executives had reportedly given their blessing in 2002 for hedge fund Millenium Partners
to market time its funds.
The written permission given by executives came to light as part of a legal battle involving Merrill Lynch & Co.
and three former brokers who had Millenium as their client, The Wall Street Journal
A testimony by a Merrill employee before New Jersey securities regulators, and records from the brokers while they were still at UBS
AG in 2001, shed light on sticky-asset deals between the brokers and Dreyfus, according to the report. Under the arrangements, Dreyfus, a unit of Mellon Financial Corp.
, allowed market-timing activity in exchange for placement of long-term investments at Dreyfus.
A spokesperson for Dreyfus declined to comment on the evidence, telling The Journal
that it would be "inappropriate for us to speculate on the contents of the testimony of internal UBS/PaineWebber documents that we have never seen, particularly in the context of ongoing proceedings to which we are not a party."
Dreyfus Chairman Stephen Canter
told shareholders in 2003 that based its review so far, the firm has not found evidence of sticky-asset deals.
The three brokers to whom Dreyfus officials gave their go-signal--Christopher Chung
, Kenneth Brunnock
and William Savnino
--have been entrenched in a legal fight with Merrill Lynch, which fired them in March 2005 owing to their involvement in the Millenium market timing transactions. The three, which were awarded more than $14 million by an arbitration panel earlier this year, are being investigated by New Jersey securities regulators.
The brokers insist that they did not engage in any wrongdoing, citing permission given to them by the funds for the trading.
In December 2005, Millenium agreed to pay $180 million to settle allegations that it engaged in a fraudulent market timing scheme. It neither admitted nor denied wrongdoing.
A spreadsheet created by the brokers while they were employed at UBS in 2001 showed which funds permitted their trading and which ones didn't. Among those who allowed market timing were AIM Investments, PBHG and Dreyfus.
When the brokers transferred to Merrill in 2002, they were asked for evidence that they had permission from mutual funds for such transactions. An administrative and compliance officer informed New Jersey regulators that he had spoken with the broker's contact person at Dreyfus, who in turn discussed the concept of "sticky money" with him.
Letters later sent by Dreyfus officials to Merrill Lynch showed that Dreyfus was "aware" of the type of mutual-fund business done by the brokers.
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