28 July 2004 Read today’s legal news, law firm announcements & legal articles at LAWFUELMarcos Daniel Jiménez, United States Attorney for the Southern District of Florida; Michael D. Clemens, Acting Special Agent in Charge, Federal Bureau of Investigation; Stephen M. Cutler, Director, Division of Enforcement, United States Securities and Exchange Commission (“SEC”), Washington, D.C.; Dave Nelson, Regional Director, Securities and Exchange Commission, Miami, Florida; Robert J. Roseneau, Chief, Financial Investigations, Office of Financial Regulation, State of Florida; and Michael S. Reiter, Chief, Palm Beach Police Department, announced that two (2) of the four (4) individual defendants named in a Second Superseding Indictment, which charged them with, among other things, participating in a mutual fund timing and late trading scheme, have pleaded guilty. These convictions are believed to represent the first federal court criminal convictions for mutual fund “market timing” and “late trading” in the nation.
“Market timing” refers to the practice of short term buying and selling of mutual fund shares in order to exploit inefficiencies in mutual fund pricing. “Late trading” refers to the practice of placing orders to buy or sell mutual fund shares after the close of the market at 4:00 p.m. EST, but paying the price as of the 4:00 p.m. EST close. “Late trading” typically enables the trader to gain an advantage by capitalizing on news and information that occurs after 4:00 p.m. Otherwise put, the late trader profits from market events that occur after the 4:00 p.m. EST market close, but that are not reflected in that day’s closing price.
On July 27, 2004, defendant, Kautilya Sharma, a/k/a “Tony Sharma,” pleaded guilty before United States District Judge Kenneth A. Marra, in Ft. Lauderdale, Florida, to two counts of the Second Superseding Indictment. Those counts were count 20, which charged Sharma with conspiracy to sell unregistered securities, in violation of Title 15, United States Code, Sections 77e(a) and (c), and Title 18, United States Code, Section 371, and count 28, which charged Sharma with conspiracy to commit mutual fund “market timing” and “late trading,” in violation of Title 15, United States Code, Sections 78j(b) and 78ff(a), Title 17, Code Federal Regulations, Section 240.10b-5, and Title 18, United States Code, Section 371. The next day, July 28, 2004, defendant, Neal Wadhwa, pleaded guilty to count 28 of the Second Superseding Indictment, also before Judge Marra.
Sharma faces a statutory maximum sentence of five (5) years in prison on each count and a fine of approximately $2.6 million. He is scheduled to be sentenced on October 15, 2004, before Judge Marra. Wadhwa faces a statutory maximum sentence of five (5) years and a fine of approximately $280,000. Wadhwa is scheduled to be sentenced on October 29, 2004, also before Judge Marra.
As stated in the Second Superseding Indictment, Sharma, of Boca Raton, Florida, owned and controlled Geek Securities, Inc. and Geek Advisors, Inc. Geek Securities was a registered broker/dealer, and Geek Advisors was a registered investment advisor. Wadhwa was a Geek Advisors vice president. Sharma and Wadhwa were licensed brokers.
In count 28 of the Second Superseding Indictment, Sharma, Wadhwa, Geek Securities, and Geek Advisors are alleged to have conspired in a mutual fund trading scheme to make money by engaging in mutual fund “market timing” and “late trading” from 2001 until late 2003, in violation of Title 15, United States Code, Sections 78j(b) and 78ff(a), Title 17, Code of Federal Regulations, Section 240.10b-5, and Title 18, United States Code, Section 371. The defendants are alleged to have conspired to make money trading shares of various mutual funds by deceiving those funds, their shareholders, and the investing public at large by, among other things, circumventing mutual fund rules in order to engage in prohibited mutual fund “market timing” and “late trading.” Sharma and Wadhwa also are alleged to have conspired to cover-up late trading activity and to mislead the SEC with respect to the time that Geek Securities received certain trade orders, by creating false documentation as to the time those orders were received.
Mr. Jiménez commended the investigative efforts of the Federal Bureau of Investigation, the United States Securities and Exchange Commission, the Palm Beach Police Department, and the State of Florida, Division of Financial Regulation. This case is being prosecuted by Assistant United States Attorney Emalyn H. Webber and Special Assistant United States Attorney James M. Fay.
