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. Although market timing isn’t per se illegal, many mutual funds try to prevent it because it tends to harm long-term mutual fund shareholders.
Beginning in July 2001, hundreds of mutual-fund companies and two clearing firms did just that: they initially admonished Mutuals.com that its market- timing activities were improper, but, by September 2003 , approximately 294 different fund companies had banned or otherwise restricted Mutuals.com from trading in their shares, the SEC alleges.
Rather than desist, however, Mutual.com Chief Executive Richard Sapi, President Erin McDonald and Compliance Officer Michele Leftwich devised a number of ways to conceal their clients’ market-timing activities. They formed two affiliated broker-dealer firms, Connely Dowd Management and MTT Fundcorp. Inc., through which they could continue to market time the funds undetected.
The defendants also changed account numbers for customers who had been blocked from making frequent trades, changed the registration numbers of advisers who placed the trades on behalf of clients, used different branch identification numbers, and switched clearing firms, among methods, according to the complaint.
Late trading, which allows investors to profit from late breaking news that is likely to be reflected in a fund’s share price the following day, is illegal.
The SEC initially detected the alleged misconduct during an examination of the Mutuals.com investment complex in October.