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For Immediate Release:  
For Further Information Contact:
January 17, 2006

Office of The Attorney General
- Peter C. Harvey, Attorney General
Bureau of Securities
- Franklin L. Widmann, Chief

 

Peter Aseltine
609-292-4791

 

Attorney General Peter C. Harvey Reaches $10 Million Settlement
with Canary Capital and Edward Stern Over Late Trading, Market Timing

Stern, Other Key Personnel Must Cooperate in Investigations

>> Stern Consent Order (12mb pdf) plugin

TRENTON – Attorney General Peter C. Harvey today announced that Canary Capital Partners LLC, Edward J. Stern, the hedge fund’s managing principal, and two related firms will pay New Jersey $10 million to resolve allegations that they market timed mutual funds and engaged in illegal late trading to the detriment of long-term shareholders of the mutual funds.

Stern and the Secaucus-based firms – Canary Capital Partners LLC, Canary Capital Investment LLC and Canary Capital Partners Ltd. (collectively, “Canary”) – allegedly used a variety of schemes and devices to conceal their trading. They also allegedly offered various financial incentives to mutual fund companies and brokerage firms for the opportunity to late trade and/or market time funds, and for non-public information about mutual fund portfolio holdings.

Stern and Canary have agreed to cooperate fully in any further investigations being conducted by the Attorney General’s Office, including the New Jersey Bureau of Securities. They also have agreed to ensure the cooperation of any entities in which they have an ownership interest or managerial role and of all officers, directors, agents and employees of Canary and such entities. Stern and Canary have agreed as part of the settlement to be barred for 13 years from acting as broker-dealers or investment advisers.

“Market timing and late trading conduct hurts individual investors by reducing the value of their mutual fund shares,” said Attorney General Harvey. “We will protect the money of small investors from rapid trading and after hours transactions since these arrangements violate the rules of the funds and the securities laws.”

The Bureau of Securities found that Canary and Stern engaged in late trading by buying and selling mutual funds after the 4 p.m. close of the market in violation of federal securities law and regulations. Late trading involves a privileged investor making trades after hours when mutual fund shares are frozen at the closing price, in order to take advantage of late-breaking events that impact the share price when the market reopens.

In addition, the Bureau of Securities found that Canary and Stern engaged in market timing of mutual funds and mutual fund sub-accounts of variable annuity products by making frequent trades into and out of the funds to take advantage of market fluctuations. Most funds have policies against market timing, which works to the detriment of long-term investors by (1) allowing the market timer to siphon off short-term profits and dilute the value of the fund, (2) increasing the transactional costs of the fund, and (3) making the fund more difficult to manage.

“The New Jersey Bureau of Securities plays an important role by registering securities and those in the investment industry, and by enforcing our securities laws,” said Bureau Chief Franklin L. Widmann. “We investigate individual cases of fraud as well as wider patterns of abuse within the industry, such as we had in this case. We urge any investor who suspects fraud or improper practices to notify the Bureau.”

Investors can telepzone the Bureau of Securities at 973-504-3600, or call toll-free from within New Jersey at 1-866-838-6240. They also can reach the Bureau through its Web site www.NJConsumerAffairs.com/bos.htm.

Chief of Enforcement Richard Barry and Investigating Attorney Julian Leone conducted the investigation for the Attorney General’s Office.

In some cases, mutual fund companies and brokerage firms permitted Canary and Stern to market time funds in exchange for “sticky assets,” longer-term investments that generated commissions and fees.

>> Stern Consent Order (12mb pdf) plugin

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