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An Ex-Pru Broker is Found Negligent in Mutual Fund Market Timing Case Not Rated 0.0 Email Routing List Email & Route  Print Print
Thursday, December 22, 2011

UPDATED: An Ex-Pru Broker is Found Negligent in Mutual Fund Market Timing Case

News summary by MFWire's editors

The final chapter in the mutual fund market-timing scandals from a decade ago are only now being written. On December 14, a former Prudential stock broker was found liable for negligence in a mutual fund market-timing case. Now both the Securities and Exchange Commission (SEC) and the ex-broker are proclaiming victory.

Thomson Reuters' Alison Frankel covered the verdict twice, on December 16 and December 19. Law360's Richard Vanderford also covered the verdict.

The jury found Frederick J. O'Meally of Bay Shore, New York, liable for violations of Sections 17(a)(2) and (3) of the Securities Act of 1933. The SEC had argued that O'Meally used deceptive practices to evade blocks on his trading by mutual fund companies. Yet the jury also found that O'Meally had not violated Section 10(b) of the Exchange Act and Section 17(a)(1) of the Securities Act.

The district court will hear further post-trial arguments in January 2012, and may determine the appropriate sanctions and remedies against O'Meally at a later date.

O'Meally was a Prudential Securities broker from 1994 until 2003 and worked mainly with hedge fund clients.

In a release (see below), the SEC described the verdict as a win, saying that the jury found O'Meally "liable for deceptive mutual fund market timing practices." Yet O'Meally and his attorneys at Harris, Cutler & Houghteling and Ifrah Law see the trial result differently.

"I was found not guilty," O'Meally later told MFWire.com. "I was found liable for negligence which has nothing to do with fraud."

In a release of their own, O'Meally's attorneys said that O'Meally was "exonerated of fraud charges" after the jury deliberated for two days.

"I am extremely pleased with the outcome of this case against Mr. O'Meally, who did not intend to deceive anyone and defrauded no one," Ifrah Law's David Deitch stated.

"This outcome is very gratifying and demonstrates that Mr. O'Meally committed no intentional wrongdoing," agreed Jonathan Harris of Harris, Cutler & Houghteling.

Thomson Reuters reports that O'Meally's attorneys called the SEC's release "false, misleading and defamatory" and asked a federal judge to toss the case and punish the SEC. An SEC spokeswoman declined to comment to Thomson Reuters. Readers interested in finding out more about the characterization of the trial result may want to look at the full Thomson Reuters article. Former SEC enforcement attorney Thomas Gorman and University of Michigan securities law professor Adam Pritchard both weighed in on the post-trial dispute.

The verdict against O'Meally followed a five-week trial in New York City before the United States District Court Judge for the Southern District of New York.

The SEC filed its initial case on August 28, 2006 against four registered representatives formerly employed by Prudential Securities, Inc. The SEC alleged that the brokers had attempted to circumvent mutual funds' efforts to block the trades for their hedge fund customers.

The cases against the three other defendants have already been settled in 2009 and last March. According to Thomson Reuters, O'Meally won $3.6-million from Prudential in 2006 in Finra arbitration over the case.

O'Meally now runs his own hedge fund firm, Kismet Capital Advisors.


Press Release from the SEC

U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 22196 / December 16, 2011

SEC v. Frederick J. O'Meally et al., Action No. 06-CV-6483-LTS (S.D.N.Y.)

Jury Finds Former Prudential Securities Registered Representative Liable For Deceptive Mutual Fund Market Timing Practices

Jury Finds Former Prudential Securities Registered Representative Liable For Deceptive Mutual Fund Market Timing Practices

The Securities and Exchange Commission announced today that on December 14, 2011, a federal jury returned a verdict in the SEC's favor on securities fraud charges against Frederick J. O'Meally of Bay Shore, New York, a former registered representative of broker-dealer Prudential Securities Inc. alleged to have used deceptive practices to evade blocks on his trading by mutual fund companies. The jury found O'Meally liable for violations of Sections 17(a)(2) and (3) of the Securities Act of 1933 (the "Securities Act"). The verdict against O'Meally followed a five-week trial in New York City, NY before the Honorable Laura Taylor Swain, United States District Court Judge for the Southern District of New York.

The Commission filed its Complaint on August 28, 2006 against four registered representatives formerly employed by Prudential Securities, Inc. The Complaint alleged that, between 2001 and 2003, certain mutual fund companies detected market timing activity by the Defendants and attempted to block the Defendants and their hedge fund customers from further trading in their funds. The Complaint further alleged that the Defendants used fraudulent and deceptive trading practices to conceal their and their customers' identities to evade these blocks. Cases against the three other defendants had been resolved previously by settlement.

The district court will hear further post-trial arguments in January 2012, and may determine the appropriate sanctions and remedies against O'Meally at a later date. In addition, the jury found that O'Meally had not violated Section 10(b) of the Exchange Act and Section 17(a)(1) of the Securities Act.

For further information about the Commission's action in SEC v. O'Meally, et al., see Litigation Release No. 21882 (March 10, 2011) [settlement with Jason N. Ginder]; Litigation Release No. 20910 (February 25, 2009) [settlement with Michael L. Silver and Brian P. Corbett]; In the Matter of Michael L. Silver, Release No. 34-59639 (March 27, 2009); In the Matter of Brian P. Corbett, Release No. 34-59640 (March 27, 2009); Exchange Act Release No. 54371 (August 28, 2006) [settlement with Prudential Equity Group, LLC, formerly known as Prudential Securities, Inc.]; Litigation Release No. 19813 (August 26, 2006) [complaint against O'Meally, et al. filed].



Press Release from Ifrah Law and Harris, Cutler & Houghteling LLP

Monday, Dec 19, 2011

Washington D.C., December 16, 2011 — Ifrah Law and Harris, Cutler & Houghteling LLP today announced that former Prudential Securities broker, Frederick J. O'Meally has been exonerated of fraud charges brought by the Securities and Exchange Commission (SEC) after a four- week long trial in New York City before the Honorable Laura Taylor Swain in the United States District Court for the Southern District of New York.

Mr. O'Meally, who was a broker for Prudential Securities from 1994 until 2003 and worked primarily with hedge fund clients who invested millions of dollars in mutual funds using “market timing” strategies, was charged by the SEC in 2006 with fraud and negligence allegations. Three co-defendants and Prudential Securities, in a separate action brought by the SEC, all settled charges. Mr. O'Meally refused to settle, and argued that his business practices were approved by Prudential Securities management and its in-house counsel.

The SEC alleged that Mr. O'Meally defrauded 60 different mutual fund families in whose funds he traded on behalf of his market timing clients between 2001 and 2003, in violation of Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and in violation of Section 17(a) (1), (2) and (3) of the Securities Act of 1933. The SEC acknowledged that market timing per se was not illegal, but asserted that O’Meally committed fraud by deceiving mutual fund companies that were trying to exclude his market timing trading from their funds.

The eight-member jury deliberated for two days and found against the SEC on all fraud counts, concluding that Mr. O’Meally had committed no intentional wrongdoing. The jury found that Mr. O’Meally had been negligent in his trading with 6 of the 60 funds. With respect to the other 54 funds they found in favor of Mr. O'Meally. Mr. O’Meally was represented by Jonathan Harris, partner with Harris, Cutler & Houghteling and David Deitch of Ifrah Law who acted as co-lead trial counsel.

Judge Swain previously reserved a ruling on a defense motion for judgment as a matter of law on the negligence claim. A decision on this issue is not expected until early 2012. A favorable decision by the judge would mean that the only portion of the jury verdict favoring the SEC would be thrown out.

"I am extremely pleased with the outcome of this case against Mr. O’Meally, who did not intend to deceive anyone and defrauded no one, and represented his clients with integrity and professionalism throughout his career," stated David Deitch, partner with Ifrah Law. "Mr. Harris and I are continuing our efforts to persuade the court to further exonerate Mr. O'Meally of the negligence claim as well."

Jonathan Harris, partner with Harris, Cutler & Houghteling, who has represented Mr. O'Meally since the beginning of the market timing investigations in 2003, commented, "Throughout the SEC’s lengthy investigation, we have consistently represented that Mr. O’Meally's business conduct was always in good faith. This outcome is very gratifying and demonstrates that Mr. O'Meally committed no intentional wrongdoing. Mr. O'Meally is glad the trial is over and he can now devote his full attention to running his hedge fund, Kismet Capital Advisors."

In addition to Mr. Harris, the Harris, Cutler & Houghteling team included Julie Withers and Alexander Sakin.
 

Correction: A prior version of this story drew from the SEC's post-trial release on the verdict. The story has been updated to include a release from Frederick O'Meally's attorneys, comments from O'Meally, and links to other news coverage.

Edited by: Sean Hanna, Editor in Chief


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