Operations responded, “You really are a salesman…..” The author replied, “i do what i can.....just another case of promising the firm’s ‘first born’ for the ‘privilege’ of doing business!” [sic]
World Markets also approved Broker Doe and his team’s use of annuities as
another vehicle in which to market time mutual funds. World Markets’ management was fully aware that Broker Doe used annuities as an additional platform in which to engage in market timing for his customers, and that variable annuity companies, like mutual funds, did not like it.
Broker Doe’s customers used annuities to stay under the radar of mutual fund
companies. For example, in an October 2001 email relaying that they had successfully stayed off the timing reports of one annuity firm, Broker Doe exhorted his team to “stay on top of why and how to keep under the radar [and] don't get lazy penetrate more.” One way they did so was to have
their customers create separate legal entities, akin to subsidiaries, to create additional avenues for trading. For example, one customer created numerous affiliated entities so that when an annuity company stopped trading by one entity, the customer could resume trading using a “new” entity. This customer did so after an RR in Broker Doe’s group recommended this strategy.
Although the Market Timing and Late Trading was Profitable for CIHI and World Markets, It Harmed Mutual Funds and Their Shareholders
CIHI and World Markets profited from their market timing businesses. For
example, CIHI grossed approximately $43 million over five years in the form of interest on its
financing (both swaps and loans) of market timing hedge fund customers. World Markets earned approximately $28 million in the form of wrap fees paid by its market timing hedge fund customers. World Markets also received millions in 12b-1 fees from the mutual funds that were
timed by its hedge fund customers. Moreover, numerous mutual funds and their shareholders suffered hundreds of millions of dollars in dilutive harm caused by the late trading and abusive market timing trading done by customers and CIHI and World Markets.
Legal Section: CIHI and World Markets Violated Numerous Provisions of the Federal Securities Laws
CIHI Violated the Securities Laws
As a result of the conduct described above, CIHI willfully violated Section 17(a) of
the Securities Act. Section 17(a) of the Securities Act makes it unlawful for any person in the offer or sale of securities to employ any device, scheme or artifice to defraud; to obtain money by means of any untrue statement or omission of material fact; or to engage in any transaction, practice or course of business which operates or would operate as a fraud or deceit upon the purchaser. CIHI
actively participated in a fraudulent scheme by financing hedge fund customers knowing those hedge funds would use CIHI’s financing to deceptively market time and late trade mutual funds. Moreover, CIHI went to great lengths to hide CIHI’s and its customers’ market timing activities. For example, CIHI created seemingly unaffiliated subsidiaries and hedge funds in whose name