New York Attorney General Eliot Spitzer has launched a sweeping investigation into four major mutual fund companies for what he said were illegal trading practices that cost shareholders billions of dollars. “Ill gotten gains” will be returned to investors.

The companies under investigation include: Bank One Corp.’s Banc One funds, Bank of America’s Nations Funds, Janus Capital Group Inc. and Strong Capital Management.

The investigation is the latest salvo from Spitzer in his crackdown on Wall Street and once again steals the thunder from Washington, where Congress and the U.S. Securities and Exchange Commission have been probing the $6.87 trillion mutual fund business.

As part of the probe, Spitzer said he reached a $40 million settlement with hedge fund Canary Capital Partners LLC, which invested in the mutual funds in exchange for an opportunity to profit from illegal trade in mutual fund shares. New York-based Canary, which did not admit to any wrongdoing, has agreed to aid the investigation into the mutual fund companies.

Spitzer said he would seek to return “ill-gotten gains” to investors.

The SEC declined to comment on Spitzer’s recent probe and his settlement with Canary Capital, but the agency was expected to have a statement after Spitzer’s press conference. Spitzer spearheaded a probe into research practices on Wall Street that resulted in a $1.4 billion settlement by Citigroup , Merrill Lynch & Co. and eight other major firms.

Spitzer said mutual fund companies engaged in illegal after-hours trading and market exploitation that cost their shareholders billions of dollars. Canary Capital Partners, two Canary related entities, and the hedge fund’s managing principal, Edward Stern, agreed to pay $30 million in restitution and a $10 million penalty for making unlawful trades. Canary also agreed to cooperate in the investigation of the mutual fund companies.

Hedge funds are loosely regulated investment pools that can use investment techniques that are normally off limits to mutual funds.

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