CIBC’s Credit Department had to approve these transactions. The funds in the managed accounts were invested in mutual funds with the purpose of timing those funds. World Markets effected transactions in mutual fund shares in the managed accounts. The hedge fund obtained all gains made by trading in the managed account, and the hedge fund also was required to pay for all trading losses in the managed account. In exchange, the hedge fund would pay CIHI LIBOR (e.g., interest) plus 95-205 basis points on the funds CIHI contributed to the managed account. CIHI officials acknowledged that the reason for the TRSs was to avoid the margin limitations set by applicable margin regulations.
Broker Doe introduced a number of his market timing customers to CIHI so that
those market timing customers could obtain financing beyond what was allowed by the relevant margin regulations. When these customers entered into a purported TRS with CIHI, CIHI paid
Broker Doe a referral/finders fee for this new financing business.
CIHI Provided Financing to Hedge Fund Customers Knowing They Would Use The Leverage to Late Trade and Deceptively Market Time Mutual Funds
In addition to violating the margin requirements, CIHI financed hedge funds
knowing that those hedge fund customers used the leverage to late trade and deceptively market
time mutual funds.
For example, in 2001, CIHI wanted to open managed accounts at STC on behalf of
two hedge fund financing customers. The STC trading platform was designed primarily for processing trades by third party administrators for retirement plans. A CIHI Managing Director prepared a memorandum describing the “benefits” that STC provided for CIHI’s market timing customers. In this memorandum, the Managing Director expressly indicated that CIHI customers will be able to submit trades for same day value to midnight [EST] based upon the published Net Asset Values (“NAVs”). The Managing Director indicated that a pricing list is prepared and submitted to customers who are then able to run their timing models against actual closing prices instead of the previous day before they submit trades. Further, the Managing Director pointed out
that standard platforms required trades to be submitted before 4:00 p.m. by specific account number and broker reference.
The Managing Director also indicated that STC allowed customers to submit trades
in a number of methods to reduce the chance that they would appear to be timing a specific mutual fund. The different types of investing were: 1) traditional account specific fund investing keeping account balances small; 2) using a number of multiple legal vehicles (i.e. different tax identification numbers) that rotate ownership of the mutual fund transferring balances between related accounts; 3) piggy backing non-12(b)1 accounts (i.e. 401K accounts) to invest in a pool of funds on a net basis as specific ownership is not known by the fund; and 4) piggy backing 12(b)1
accounts where a specific agreement is made with an RR to include the additional fund investments.