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Sihpol's Criminal Case Begins Next Month: Defense Will Argue Definition of Late Trading

To hear former Bank of America broker Theodore C. Sihpol III's account of what led to his arrest in September 2003 on charges of fraud, an event that set the entire mutual fund scandal in motion, he was an unwitting, bit player among more crafty financial managers who worked a late-trading conspiracy within a gray area of what the industry considers legally and ethically acceptable.

He claims he is not, as New York Attorney General Eliot Spitzer alleges, the billion-dollar embezzler who blatantly ignored shareholder interests, knowingly misled investors and consciously skirted industry best practices to allow hedge fund Canary Capital to trade mutual fund shares after the market close while still receiving that day's price.

The criminal trial for Sihpol, whose case has been argued for more than 16 months in the court of public opinion, will begin with jury selection in New York Supreme Court on April 26. The 37-year-old is facing up to 25 years in jail for grand larceny and another four years for falsifying records. In total, he's charged with 40 counts of securities fraud.

A motion to dismiss the charges, filed by his attorney C. Evan Stewart primarily on the grounds that Sihpol could not be guilty of late trading since the industry, through forward-pricing guidance by the Securities and Exchange Commission would typically not set the net asset value of a mutual fund's shares until 5:30 p.m., is before New York Supreme Court Justice James Yates. Spitzer's office countered the motion by saying that the defense was trying to misconstrue the Investment Company Act of 1940, which sets the NAV pricing times, as well as misrepresent and misquote the prospectuses of hundreds of funds that set the time as 4 p.m. The judge has indicated that the trial should move forward.

But that's just one part of the case. Another key element is determining exactly who initiated the late-trading conspiracy between Bank of America and Canary Capital.

Sihpol's defense argues, in short, that he was doing as he was told, which was to set up an electronic trading agreement through Bank of America's San Francisco and New York offices and Canary Capital. His defense claims that BoA San Francisco mutual fund chief Mike Boston told him that trades needed to be received by 5:15 p.m. to receive that day's NAV. Spitzer's office contends that, as a licensed trader, Sihpol's job was to make "cold calls" to high-net-worth clients and arrange investment agreements with Bank of America. And while his supervisors, including former BoA executive Charles Bryceland and trader Michael Tierney, helped arrange the agreement between Canary Capital and Bank of America during two meetings in Manhattan, it was Sihpol's unit that made first contact and carried out the late-trading scheme.

Stewart also maintains that Sihpol did not profit from the activity, while the prosecution says the defendant was "well-paid" via a wrap-fee of 0.5% to1% of the assets traded. Spitzer also alleges that Sihpol destroyed documents related to the conspiracy.

Canary Capital and Bank of America have already reached settlements with Spitzer's office without admitting or denying any wrongdoing. Fraud charges against Sihpol's bosses, Bryceland and mutual fund chief Robert Gordon, were dismissed. Like Sihpol, Gordon was fired in the wake of the arrest, and Bryceland announced his retirement prior to the scandal.

In a related, high-profile fraud case that could illicit juror sympathy for Sihpol, PBHG founders Gary Pilgrim and Harold Baxter were barred from the industry and hit with heavy fines, but never prosecuted criminally for what many consider much more egregious market-timing offenses.

Stewart, the case's leading defense attorney and a partner at the New York law firm Brown Raysman Millstein Felder & Steine, last week outlined Sihpol's defense.

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