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Rating:SEC Settles With Zurich on Behalf of Mutual Funds Not Rated 1.0 Email Routing List Email & Route  Print Print
Wednesday, May 09, 2007

SEC Settles With Zurich on Behalf of Mutual Funds

News summary by MFWire's editors

A soon-to-be defunct subsidiary of Zurich Financial Services has settled with the SEC over charges that it helped four hedge funds to defraud mutual funds of over $10 million. Zurich Capital Markets (ZCM) will pay a total of $16.8 million in profit, interest and fines, to be distributed to the mutual funds harmed by its facilitation of "deceptive market timing."


Washington, D.C., May 7, 2007 - The Securities and Exchange Commission today announced a settled administrative proceeding against Zurich Capital Markets Inc. (ZCM) for its role in providing financing to hedge fund clients that engaged in market timing of mutual funds and facilitating the hedge funds' deceptive trading tactics. The Commission ordered ZCM, a New York-based subsidiary of Zurich Financial Services, to pay $16.8 million consisting of $12.8 million in disgorgement and prejudgment interest and a $4 million penalty. The money will be distributed to the mutual funds that were harmed as a result of market timing ZCM facilitated.

Mark K. Schonfeld, Director of the New York Regional Office, said, "By knowingly financing their hedge funds clients' deceptive market timing, ZCM reaped substantial fees at the expense of long-term mutual fund shareholders. Because of ZCM's attractive financing arrangement and its willingness to create a number of anonymous special purpose vehicles (SPVs) for its hedge fund clients, the hedge funds were able to inflate their trading profits from their deceptive conduct."

Helene Glotzer, Associate Director of the New York Regional Office, added, "This action demonstrates that the Commission continues to carefully examine the role of financial intermediaries that assist hedge funds engaged in deceptive practices."

The Commission's Order finds that ZCM aided and abetted four hedge funds that were carrying out schemes to defraud mutual funds that prohibited market timing. ZCM's hedge fund clients knew that many of these mutual funds prohibited market timing. In an effort to avoid being detected and potentially blocked from making market-timing trades in these funds, each of these hedge funds and ZCM disguised their identities. For example, ZCM created seemingly unaffiliated SPVs in whose name multiple brokerage accounts were opened, thus enabling ZCM's hedge fund clients to disguise their identities and market time mutual funds.

The Order finds that ZCM profited from the fees it received from the business of providing derivative financing to hedge funds engaging in a mutual fund market-timing strategy. As a result, the Commission's Order finds that ZCM willfully aided and abetted and caused violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

ZCM, which is currently winding down its operations, consented to the entry of the Commission's Order without admitting or denying the Commission's findings. In determining to accept the settlement, the Commission considered ZCM's cooperation in this investigation. 

Edited by: Marie Glancy


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