2003 Mutual-fund scandal

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Spitzer investigation

On September 3, 2003, New York Attorney General Eliot Spitzer announced the issuance of a complaint against New Jersey hedge fund company Canary Capital Partners LLC, charging that they had engaged in 'late trading' in collusion with Bank of America's Nations Funds. Bank of America is charged with permitting Canary to purchase mutual fund shares, after the markets had closed, at the closing price for that day. Spitzer's investigation was initiated after his office received a ten-minute June 2003 phone call from a Wall Street worker alerting them to an instance of the late trading problem.

'Late trading'

Late trading is illegal under New York's Martin Act and U.S. Securities and Exchange Commission (SEC) regulations due to the unfair advantage the late trader gains over other traders. In the United States, mutual fund prices are set once daily at 4:00 p.m. Eastern time. Late trading occurs when traders are allowed to purchase fund shares after 4:00 p.m. at that day's closing price. Under law, most mutual fund trades received after 4:00 p.m. must be executed at the following day's closing price.
Canary Capital settled the complaint for US$40 million, while neither admitting nor denying guilt in the matter. The Bank of America stated that it would compensate its mutual fund shareholders for losses incurred by way of the illegal transactions.
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