Trial Opens for Broker in Mutual Fund Case

[FaGal]

Sihpol defense rests as 7 counts dismissed
www.boston.com - By Bloomberg News - May 26, 2005


Lawyers for ex-Bank of America Corp. broker Theodore Sihpol III yesterday rested their defense in his trial on charges of late-trading in mutual funds without calling any witnesses, after seven counts were dismissed from the case.

The dropped counts charged Sihpol, 37, with falsifying business records. Five of those counts, dismissed by Manhattan state Supreme Court Justice James Yates at the request of defense lawyers, accused Sihpol of discarding completed order tickets for mutual fund trades by Canary Capital Partners LLC after the Secaucus, N.J.-based hedge fund had canceled them.

Prosecutors say that from 2001 to 2003, Sihpol accepted lists of possible trades from Canary before trading closed at 4 p.m. After 4 p.m., Canary confirmed which orders it wanted executed, according to New York Attorney General Eliot Spitzer's office, which brought the case. US regulators say such late-trading is illegal. Sihpol contends he did nothing wrong.

''Just because Canary gave Sihpol something before he ripped it up, it wasn't a business record," Yates said yesterday.

Assistant Attorney General Harold Wilson withdrew two of the counts and told Yates he disagreed with the judge's decision to dismiss the other five. Outside the courtroom, Wilson declined further comment. Twenty-two counts of falsifying business records remain. Sihpol is also charged with larceny and securities fraud.

Spitzer accused Sihpol of allowing Canary to place orders after the New York Stock Exchange was closed, at that day's prices, instead of waiting for the market to reopen the next day when the prices may have changed. Canary is now defunct.

Sihpol's case is the first stemming from Spitzer's mutual fund probe to go to trial. Under Securities and Exchange Commission rules, mutual fund shares trade at the price set at 4 p.m., the end of the trading day, Spitzer has said.

[FaGal]

Broker cleared on 29 counts in after-hours trading trial
seattletimes.nwsource.com - By Samuel Maull - The Associated Press - June 10, 2005


NEW YORK — Former Bank of America broker Theodore Sihpol III was acquitted yesterday of 29 counts, including a top charge of grand larceny, at a trial related to after-hours mutual-funds trading.

State Supreme Court Justice James Yates declared a mistrial on four deadlocked counts in the first case tried as a result of state Attorney General Eliot Spitzer's probe of the securities industry.

Sihpol, 37, still faces civil litigation filed by the federal Securities and Exchange Commission (SEC) and other parties.

Spitzer had claimed that Sihpol helped hedge fund Canary Capital Partners earn tens of millions of dollars through illegal after-hours trading of fund shares after East Coast securities markets closed at 4 p.m. Under that practice, the prosecutors said clients could profit from news that develops after the market closes and still get the day's closing price.

Defense lawyers said no law barred late trading of mutual funds. They argued that Sihpol's actions, open, well-known and consistent with bank practices, showed there was no criminal intent on his part.

"We're very pleased that at least the jury reached the right result on 29 counts. We believed in Ted's innocence," one of Sihpol's lawyers, Evan Stewart, said outside the courtroom.

"Ted will be busy regaining his reputation and getting on with his life. He's been through a terrible ordeal for two years," Stewart said. "He was prosecuted for conduct for which no one had ever been prosecuted before."

Spitzer's office said in a statement it accepted the jury's decision. "We will continue to vigorously defend the interests of investors," it said.

Stewart said it is up to the attorney general to decide whether to retry the four counts on which the jury deadlocked. That will likely be discussed June 23, when the parties return to court, he said.

The judge declared a mistrial on charges of first-degree scheme to defraud, violation of the state's general business law (the Martin Act), and two first-degree counts of falsifying business records.

He read into the record a note that said one juror "has resisted all our appeals to reason and evidence," had "withdrawn from deliberations" and had refused to discuss the case further.

Two jurors interviewed after the deadlock was announced said that while there was wrongdoing, they were not convinced that Sihpol was guilty of the crimes with which he was charged.

"We felt something was definitely wrong with the late trading and all that, but we felt the people who should have been on trial weren't on trial," said juror William Huddleston, 50, a custodial worker.

Juror Cheryl Fader, 52, an independent bookseller, said, "I don't think he had any intent. I think he followed the bank's policy, and if anybody should be penalized it's the bank."

Sihpol was indicted in April 2004 on charges of scheme to defraud, first-degree grand larceny, violations of the state's business law (specifically securities fraud) and falsifying business records.

The indictment accused Sihpol of stealing more than $1 million from each of six mutual funds in $2.3 billion worth of trades. The funds were the Nations Funds Trust, which is associated with Bank of America; PIMCO Funds; MFS Family of Funds; Janus Investment Fund; Fred Alger Fund, and RS Investment Trust.

Stewart had argued that no law made it a crime to trade mutual funds after 4 p.m. In his final instructions to jurors, Yates had said federal trading rules were not before them for consideration. Rather, they were to decide whether Sihpol was guilty of the charges against him.

[FaGal]

New York Times
June 10, 2005
Acquittal in Trading of Funds
By RIVA D. ATLAS and REED ABELSON

A former broker with the Bank of America Corporation was acquitted yesterday of 29 counts tied to improper trading in mutual funds, the first major legal defeat for the New York State attorney general, Eliot Spitzer. A mistrial was declared on four remaining counts.

The former broker, Theodore C. Sihpol III, 37, had been accused of enabling a hedge fund manager, Edward J. Stern, to make improper trades in mutual funds. It was a tip about trading by Mr. Stern's hedge fund in 2003 that initiated a sweeping investigation of the mutual fund industry by Mr. Spitzer's office, joined by the Securities and Exchange Commission and other regulators.

Mr. Sihpol, while a relatively low-level figure, was the first executive to be brought to trial in that investigation. Mr. Spitzer, who has made his reputation largely on groundbreaking settlements over abuses in financial services, had never before had his office tested in a major courtroom battle.

Some lawyers yesterday saw the verdict as a significant setback for Mr. Spitzer, who is seeking the Democratic nomination for governor of New York next year.

"I think this is a major blow to Eliot Spitzer and his campaign against Wall Street," said Robert G. Heim, a former lawyer with the Securities and Exchange Commission, who is now a partner at Meyers & Heim.

The attorney general's office is preparing a lawsuit against Richard A. Grasso, the former chairman of the New York Stock Exchange, over his compensation package. And it has sued the insurance giant American International Group and its former top two executives, Maurice R. Greenberg and Howard I. Smith. Mr. Heim said he suspected that lawyers for Mr. Grasso and Mr. Greenberg were "watching this case very carefully."

But other lawyers said that while the case was a disappointment, it did little to diminish Mr. Spitzer's reputation as a tough adversary.

Roland G. Riopelle, a former federal prosecutor who practices law at Sercarz & Riopelle, said Mr. Spitzer was responsible for a sweeping overhaul of the mutual fund industry, through numerous agreements and settlements with executives and companies.

"He's accomplished a hell of a lot long before this case went to the jury," he said.

Lawyers also said that the case involving Mr. Sihpol was challenging because the prosecution needed to persuade the jury that Mr. Sihpol intended to commit a crime.

"Criminal cases are always difficult," Darren Dopp, a spokesman for Mr. Spitzer, said yesterday, citing the higher burden of proof.

But Mr. Dopp said the case should be seen in a broader context. "We implemented sweeping reforms," he said. "Late trading and market timing are outlawed practices. We lost this case, but efforts to bring accountability in the mutual fund industry continue."

A New York State Supreme Court jury in Manhattan found Mr. Sihpol not guilty on all but four counts, where they were deadlocked, and Justice James Yates declared a mistrial on those four.

The judge read into the record a note that said one juror "has resisted all our appeals to reason and evidence," had "withdrawn from deliberations" and had refused to discuss the case further.

One of Mr. Sihpol's lawyers, C. Evan Stewart, a partner in the firm of Brown Raysman Millstein Felder & Steiner, said: "We are very pleased. Ted never thought what he did was criminal. It took a lot of courage to go through this ordeal."

He said that Mr. Sihpol could not comment on the acquittal because of the litigation he still faces, including a pending S.E.C. enforcement action as well as civil cases.

"He is focused on his son right now," Mr. Stewart said. Mr. Sihpol has been taking care of his 3-year-old son since he left Bank of America in 2003. His wife, a former compliance official at Bank of America, works for Smith Barney.

Mr. Sihpol began working at Bank of America in December 2000 as a broker in its New York private client services group. A month later, Mr. Sihpol called Mr. Stern, a scion of one of New York's wealthiest families. Mr. Stern called back, and by May 2001, Mr. Sihpol was arranging for Mr. Stern to make after-hours trades in and out of mutual funds. Mr. Stern ended his trading with Bank of America in July 2003.

Throughout the six-week trial, Mr. Sihpol's lawyers portrayed him as an inexperienced junior employee of the bank, and argued that other executives at Bank of America had to have been aware of Mr. Stern's trading arrangements. They also noted that Mr. Stern, whose family once owned the Hartz pet supply company and whose net worth has been estimated at $3 billion, avoided prosecution by paying a $40 million fine.

Another lawyer for Mr. Sihpol, Paul Shechtman, said:. "Going after the low guy on the totem pole is not the best way to endear yourself to the jury. Every juror we spoke to said they thought singling him out was not a good thing."

Mr. Sihpol was acquitted of all but two counts of falsifying business records, one count of scheming to defraud and one violation of the state's general business law.

During the trial, prosecutors repeatedly offered e-mail transcripts and recordings of phone conversations between Mr. Sihpol and Noah Lerner, a deputy of Mr. Stern's, in which Mr. Sihpol appeared to have something to hide.

In one call, early in the trading relationship between Canary and Bank of America, Mr. Sihpol reassured Mr. Lerner that he knew a technician who had the key to the machine that put the time stamp on trading tickets.

Harold Wilson, the lead prosecutor, said at the trial that Mr. Sihpol "knew all along that what he did was fraudulent."

The challenge for Mr. Spitzer's lawyers was not to prove whether Mr. Sihpol arranged the trades for Mr. Stern, but whether Mr. Sihpol was aware that those trades were wrong.

Mr. Spitzer has said repeatedly since his office's settlement with Mr. Stern that late trading is illegal. He and other lawyers on his staff have noted that the 4 p.m. close of trading is generally specified in mutual fund filings.

But Mr. Sihpol's lawyers maintained that the securities laws did not explicitly say that trading in mutual funds must be completed by 4 p.m., so he could not have known his behavior was wrong.

In addition, under cross-examination by Mr. Shechtman, Mr. Stern said he had been aware of a legal opinion indicating that late trading was not illegal that was received by a brokerage firm, Brean Murray & Company, which handled after-hours mutual fund trades for Canary.

It was only after the mutual fund trading scandal surfaced that the S.E.C. sought to adopt a rule that would explicitly require funds to have received any trading orders by 4 p.m.

That rule is still pending, after the industry protested that certain investors, including pension plans and individuals on the West Coast, would be put at a disadvantage if the deadline were strictly enforced.

Mr. Spitzer must decide by June 23 whether he will continue to pursue the four remaining counts against Mr. Sihpol. Mr. Dopp said no decision had been made. Lawyers for the attorney general will probably try to interview jurors in coming days before making a decision, he said.

Mr. Dopp added that, although this was the first criminal case to come to trial, Mr. Spitzer had won guilty pleas from six executives linked to improper mutual fund trading. Another case, involving former executives at Security Trust Company and at the Canadian Imperial Bank of Commerce, may come to trial this summer.

Mr. Dopp said that it would be a mistake to read the acquittal as a broader defeat for Mr. Spitzer's efforts. "Our record for the last two years speaks for itself," he said.

Mr. Shechtman agreed. "This should not be read as a jury saying that what Eliot Spitzer has done is for naught," he said. "There is no doubt that he has spoken on important conflicts of interest and he has been an aggressive and successful attorney general. But when you bring a criminal indictment, you have to prove it, and on this one, he didn't."