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Thursday, February 05, 2004

New Class Action In Fund Scandal

by: Nicole Halsey

A new class action has been filed against Capital Management Investors and Security Trust Company alleging, like many of the other suits filed after the numerous fund scandals broke, that the companies violated securities laws, namely the Securities Exchange Act of 1934.

The newest suit was filed by Bernstein Liebhard & Lifshitz in the United States District Court for the District of Arizona on behalf of all persons who purchased or otherwise acquired shares or other ownership units of one or more of a total of 397 mutual funds that were manipulated by Capital Management Investors Holding and other defendants.

Security Trust executives Grant Seeger and William Kenyon were also named in the suit. It alleges that they facilitated and participated in fraudulent late trading and market timing schemes by a group of related hedge funds. The suit also alleges that during the Class Period, (May 22, 2000 through and July 3, 2003) Seeger and Kenyon allowed hundreds of late trades by hedge funds to be processed in nearly 400 different mutual funds. According to the suit, approximately 99% of these trades were transmitted to STC after the 4:00 p.m. EST market close; 82% of the trades were sent to STC between 6:00 p.m. and 9:00 p.m. EST. The suit also alleges that the hedge funds' late trading was effected by defendants through STC's electronic trading platform, which was designed primarily for processing trades by third party administrators for retirement plans.

“STC repeatedly misrepresented to the mutual funds that the hedge funds were a retirement plan account, even though STC's employees and senior management, including Seeger and Kenyon, knew that the hedge funds were not a TPA or a retirement plan account. The mutual funds expected that retirement plans and their TPA's required several hours after the market closed to process trades submitted by thousands of plan participants before market close, but the hedge funds had no such business purpose for submitting their own trades as late as five hours after market close,” the suit reads.

The suit continued that as a result of the late trading and market timing activities facilitated by the defendants, the hedge funds involved gained a profit of approximately $85 million. STC had a compensation arrangement with the hedge funds that included a custodial fee as large as 1% (STC charged most of its TPA clients a custodial fee of just .10%) and a 4% profit sharing arrangement with respect to most of the hedge funds' trades. STC received over $5.8 million in direct compensation from the hedge funds.  

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