Eliot Spitzer may have painted mutual funds as the bad guys, but there has long been a school of thought that contended funds were the victims -- not the perpetrators in the fund skimming scandals. Now a U.S. prosecutor is taking a similar stance, reports the WSJ
, the U.S. Attorney for the Eastern District of Pennsylvania based in Philadelphia, is charging Beacon Rock Capital
(a Portland, Oregon-based hedge fund) and Thomas Gerbasio
with criminal fraud for allegedly using a deceptive market timing strategy to skim from mutual funds. [See the charges, pdf format
Gerbasio headed Fiserv Securities mutual fund department based in Philadelphia from May 2003 until April 2004, when he left Fiserv. Prior to that he was the supervisor of Fiserv's New York market timing office from August 2002 until May 2003. He joined Fiserv when the Denver-based company purchased Investec Ernst & Co. of New York in August 2002. Gerbasio started trading at Investec Ernst in 1999, according to Meehan.
Meehan contends that Gerbasio executed the fraudulent trades starting in August 1999 when he was at Investec Ernst and continuing until his May 2003 promotion by Fiserv Securities.
Fiserv has not been charged with any wrongdoing. The charges brought by Meehan name Gerbasio as the only individual and Beacon Rock Capital is named as only corporate defendant.
"These defendants would not have been able to make the money that they did on the trades had they not misrepresented themselves to the mutual funds," said Mr. Meehan. "That is where the fraud occurred. Mr. Gerbasio and Beacon Rock were aware of and received numerous warnings from mutual-fund companies that market timing was unwanted and potentially harmful to their shareholders. The defendants simply found a way around the obstacles by cheating."
Meehan's action comes after politicians such as former New York Attorney General Eliot Spitzer have departed the field and may mark the beginning of a more measured weighing and prosecution of deceptive market timers. Those timers, who often mask their identity, are the bane of fund executives who lack the tools to effectively bar determined timers who are willing to disguise their identity and trade through multiple accounts and even multiple brokerage firms.
The prosecutor alleges the fund firms warned Beacon
Rock numerous times to cease its timing trades since they were harmful to shareholders. Rather than taking head of the warnings, though, Gerbasio and others hid the identity of Beacon Rock and the intent of its trades. Meehan also alleges that Beacon Rock officials were aware of Gerbasio's actions.
Gerbasio's tactics are by now familiar to most fund officials (interestingly, he was never licensed as a stock broker). Meehan alleges that Garbasio created multiple account numbers, kept trading amounts under certain sizes to avoid triggering scrutiny, traded through multiple clearing firms and was less then forthright about Beacon Rock's trading strategy when directly asked about it by funds.
In the end, Meehan alleges that Beacon Rock earned $2.4 million through from more than 26,000
market timing trades and that Gerbasio was paid $215,000 as a direct result of the illegal trading.
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