Three registered reps who helped a hedge fund client market-time mutual funds have been barred from the securities industry. The NYSE/Euronext took the action [pdf
] against Christopher Chung, Kevin Brunnock, and William Savino after a NYSE hearing officer found that the three used deceptive practices to place trades for Millennium Partners from October of 2000 to October of 2003.
The three reps neither denied nor acknowledged any wrongdoing as a part of the settlement.
The action outlined how the reps attempted to hide the identity of the hedge fund client while placing thousands of mutual fund trades that were not allowed by the funds.
Chung, Brunnock and Savino had first placed trades for Millennium when they were at UBS. They later moved to Merrill Lynch where their practice was known as the CBS Group.
Millennium Partners was backed by Izzy Englander and the "statistical" trading strategy was implemented by Steve Markovitz. Millennium agreed to pay $180 million in fines in 2005 (published reports speculated that it had earned as much as $500 million from its trading activity). In 2003, Markovitz plead guilty to New York state charges that he placed illegal, after-close trades in mutual funds.
To deceive mutual funds into accepting the timing trades, the NYSE hearing officer found
that the CBS Group used multiple accounts, multiple financial advisor numbers, journaling strategies, and sticky assets agreements.
In the end the they placed more than 25,000 short-term trades in mutual funds and fund-like sub-accounts of variable annuities and other insurance products for Millennium Partners. More than 19,000 of the trades were placed while they were reps at UBS. Those trades generated nearly $10 million in revenues for UBS.
Because of the trades, fund firms issued as many as 150 stop notices to stop the CBS Groupís market timing, according to the NYSE.
To get the trades through while they were at UBS, the brokers used 35 Millennium accounts, more than 20 annuity contracts, two branch codes, six different FA and FA split numbers.
After moving to Merrill Lynch, the CBS Group placed approximately 3,700 short-term trades with more than 200 different mutual funds through a dozen Millennium accounts. In response, fund firms sent more than a dozen stop notices complaining about the CBS Groupís market timing activity.
The CBS Group responded to the stop notices by opening new accounts for Millennium through which they rotated trades to continue their short-term trading, according to the NYSE hearing officer.
After being instructed by Merrill Lynch to cease the market timing, the CBS Group entered into a "sticky asset arrangement" with a fund representative which permitted the CBS Group to conduct frequent trading in the fund in exchange for the CBS Groupís placement of a long-term or sticky asset investment of $1 million. This market timing arrangement with the mutual fund lasted until May 2003, according to the NYSE.
The NYSE did not identify the mutual fund with which the arrangement was made.
While at Merrill Lynch, the CBS Group used more than 60 accounts and 30 annuity contracts to place more than 6,000 short-term mutual fund transactions in Millennium accounts held with and away from Merrill Lynch.
Merrill Lynch consented to a censure and a fine of $13.5 million in March of 2005 for its failure to supervise the CBS Group. In January 2006, UBS Financial agreed to a ensure and payment of $49.5 million for failing to supervise a number of financial advisors, including the CBS Group.
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