The U.S. Securities and Exchange Commissiontoday announced a settled administrative proceeding against Zurich Capital Markets Inc. for its role in providing financing to hedge fund clients that engaged in market timing of mutual funds and facilitating the hedge funds’ deceptive trading tactics.
The commission ordered ZCM, a New York-based subsidiary of Zurich Financial Services, to pay US$16.8 million consisting of US$12.8 million in disgorgement and prejudgment interest and a US$4 million penalty. The money will be distributed to the mutual funds that were harmed as a result of market timing ZCM facilitated.
ZCM, which is currently winding down its operations, consented to the entry of the order without admitting or denying the commission’s findings. In determining to accept the settlement, the commission considered ZCM’s cooperation in this investigation.
The commission’s order finds that ZCM aided and abetted four hedge funds that were carrying out schemes to defraud mutual funds that prohibited market timing. ZCM’s hedge fund clients knew that many of these mutual funds prohibited market timing, it says. In an effort to avoid being detected and potentially blocked from making market-timing trades in these funds, each of these hedge funds and ZCM disguised their identities. For example, ZCM created seemingly unaffiliated special purpose vehicles in whose name multiple brokerage accounts were opened, thus enabling ZCM’s hedge fund clients to disguise their identities and market time mutual funds, the SEC notes.
“By knowingly financing their hedge funds clients’ deceptive market timing, ZCM reaped substantial fees at the expense of long-term mutual fund shareholders. Because of ZCM’s attractive financing arrangement and its willingness to create a number of anonymous special purpose vehicles for its hedge fund clients, the hedge funds were able to inflate their trading profits from their deceptive conduct,” said Mark Schonfeld, Director of the SEC’s New York Regional Office.
SEC settles administrative proceeding Against Zurich Capital Markets
Firm to pay US$16.8 million for financing of hedge funds’ illegal market timing
- By: James Langton
- May 7, 2007 May 7, 2007
- 10:45