Broker Settles with SEC for Market Timing: $50,000 Fine Imposed
November 21, 2005
The Securities and Exchange Commission has issued an order instituting administrative proceedings pursuant to a section of the Securities Exchange Act of 1934, imposing remedial actions against Kraig L. Kibble, the former director of operations for National Clearing Corp., for permitting market timing and late trading.
The Commission's order was based on the entry of final judgment made by Judge Percy Anderson of the U.S. District Court for the Central District of California. Judge Anderson imposed a $50,000 penalty on Kibble, who accepted the entry of final judgment.
It all began when Beverly Hills, Calif.-based JB Oxford Holdings, the parent company of NCC, was found to have violated federal securities laws having to do with late trading and market timing. NCC also took part in fraudulent late-trading and market-timing schemes. It made almost $1 million in profits and allowed its institutional customers to collect approximately $8 million in illegal revenue, directly affecting long-term mutual fund shareholders.
From June 2002 until September 2003, the defendants, James G. Lewis, a member of Oxford's board of directors as well as its president and chief operating officer, James Y. Lin, the vice president of correspondent services at Oxford and NCC, and Kibble assisted in facilitating and hiding more than 12,000 late trades for certain institutional clients in more than 74 mutual fund families, which includes over 600 mutual funds.
Some of these funds were the AIM Funds, Alliance Capital Funds, American Skandia Funds, Armada Funds, Harbor Funds, PAX Funds, Saratoga Funds and SunAmerica Capital Services Funds.
The three executives assisted by placing orders to buy and sell mutual fund shares as late as 7 p.m. instead of at 4 p.m., which is the time that mutual funds calculate their net asset value. The traders profited from market events that occurred after that time and that had not been reflected in that day's price.
The three executives also took part in covering up their clients' market-timing activities from the mutual funds. Although market timing is not illegal, it can harm other mutual fund shareholders because it can potentially weaken the value of their shares, if the market timer is exploiting inadequacies.
With the approval of Lewis, Kibble transmitted and approved the transmittal of late trades to mutual funds. Also, with Lewis in the know, Lin and Kibble took part in practices designed to hide the market timing by NCC customers from the mutual funds. This was done by opening several accounts, with different account numbers, for the same customer and using different representative codes and office codes when transmitting the orders. By taking part in such a conspiracy, each of the defendants knowingly violated the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934.
In May of 2002, Lewis began negotiating the opening of two new Swiss-based money management firm accounts at NCC in the amount of $5 million each. Lewis then met with the Swiss firm's London investment advisor, and during the meeting Lewis learned that the London advisor was interested in finding a U.S. brokerage firm to help carry out his main trading strategy: market timing.
He also learned that the London advisor planned to use market news and market performance data issued after the close of the market in making trading decisions. Lewis knew perfectly well that in order to do business with this firm, he would have to provide services in conjunction with these illegal strategies. With this knowledge, Lewis then directed Kibble and Lin to begin assisting him in the fraud.
NCC's computer system, which processed retail trades, was programmed to alert all retail customers that placed mutual fund orders after 4 p.m., Eastern Standard Time, that the orders would be placed at the next day's net asset value. The three executives got around this safeguard by authorizing the mutual fund personnel to enter the trades manually after 4 p.m. and still receive the same day's net asset value.
In July of 2003, the firm was subpoenaed by the New York Attorney General to present documents having to do with any late-trading and market-timing activities. At that point, the chief compliance officer of NCC learned for the first time that the firm had been taking part in late trading and market timing, and he ordered Kibble and the members of the mutual fund department to stop. But they defied him and continued with the late trading and market timing until Sept. 3, 2003, when the New York Attorney General filed a civil complaint against Canary Capital Partners related to its own late-trading and market-timing activities.
JB Oxford Holdings then reported its revenues for 2002 and 2003, including the $1 million in proceeds that its subsidiary received from compensation arrangements with its institutional customers who engaged in late trading and market timing. Lewis signed JB Oxford's 2002 and 2003 forms and submitted them to the SEC. That is when the SEC re-alleged violations against all of the defendants.
The defendants "obtained money through untrue statements of a material fact or by omitting to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading," the SEC claimed.
Altogether, the SEC made three claims for relief, and requested that the court issue findings of the fact and conclusions of law that the defendants actually committed the violations, issue judgments, enter an order pursuant to the Securities Act and order the defendants to return any ill-gotten gains and to pay civil penalties.
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