Release Date: 11/25/2003
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The Office of the Comptroller of the Currency, the
Securities and Exchange Commission, and the New York Attorney General today
jointly announced a series of actions against Phoenix, Arizona-based
Security Trust Company, N.A. (STC) and three former executives, arising from
their participation in mutual fund late trading and market timing schemes.
The NYAG announced criminal actions against STC’s former
chief executive officer, Grant D. Seeger; its former president, William A.
Kenyon; and its former senior vice president for corporate services, Nicole
The SEC announced the filing of civil fraud charges
against STC, Seeger, Kenyon, and McDermott.
The OCC announced that STC will begin a process that will
result in an orderly dissolution of the bank by March, 31, 2004. An order
signed today by the OCC, which is the bank’s primary regulator, requires the
bank to take steps to ensure that the trust accounts and investment plans it
administers experience the minimum disruption possible. The OCC also took an
enforcement action against STC last month requiring the bank’s controlling
shareholder, Capital Management Investors Holdings, Inc. (CMIH), Chicago,
Illinois, to provide a substantial capital infusion and make a general
pledge of its assets that ensures the bank will have sufficient funds
available for an orderly dissolution.
The Labor Department’s Employee Benefits Security
Administration, which enforces provisions of the Employee Retirement Income
Security Act that are designed to protect retirement and employee benefit
plans, also participated in the OCC investigation.
An investigation by the New York Attorney General's
office implicated Security Trust in certain improper and illegal activities,
including late trading and market timing, and triggered an investigation by
the other agencies.
“I want to thank the OCC, SEC and Labor Department for
their excellent assistance and cooperation on this case,” said New York
Attorney General Eliot Spitzer. “Coordination by regulators is imperative in
ensuring that individuals and corporations are held accountable for
misdeeds, and this case shows how that can be accomplished.”
“This action is an impressive example of cooperation
between state and federal government agencies,” said Comptroller of the
Currency John D. Hawke, Jr. “Everyone involved displayed a high degree of
professionalism and dedication, and acted in the best interests of the
“Financial intermediaries who illegally permit their
customers to trade mutual fund shares at the expense of long-term investors
violate the securities laws and will be held accountable,” said Stephen M.
Cutler, Director of the SEC's Division of Enforcement. “Today's important
action was a product of swift investigation and effective cooperation by
federal and state agencies alike.”
Contact Name: Bob Garsson (Office of the Comptroller of the Currency) Phone
Contact Name: John Nester (Securities and Exchange Commission) Phone
Contact Name: Darren Dopp (Office of the New York Attorney General) Phone
Contact Name: Ed Frank (U.S. Department Of Labor) Phone Number: 202.693.4676
NEW YORK -- A former executive with Security Trust Co. pleaded
guilty Tuesday to securities fraud in connection with illegal late trading of
mutual- fund shares. Nicole McDermott, formerly STC's senior vice
president of corporate services, "admitted to directing STC employees to place
numerous orders for mutual fund shares on behalf of two hedge fund clients after
the 4:00 p.m. cutoff," New York Attorney General Eliot Spitzer's office said in
a news release. The crime is a felony, punishable by a maximum of
four years in prison, according to Mr. Spitzer's office. In November,
Mr. Spitzer and the Securities and Exchange Commission brought coordinated
actions against Ms. McDermott and two other STC executives -- Grant
Seeger, the chief executive, and President William Kenyon -- and
all were charged with securities fraud, grand larceny and falsifying business
The Office of the Comptroller of the Currency, which
had regulatory oversight over STC, also brought an enforcement action that
will result in the dissolution of the company. An SEC official
was not immediately available to say if the commission had reached any agreement
with Ms. McDermott or Messrs. Seeger or Kenyon.
The regulators accused STC and the three executives of
facilitating hundreds of illegal after-hours trades in nearly 400 mutual funds
by hedge fund Canary Capital Partners LLC over a period of more than three
Attorneys representing Ms. McDermott and Messrs. Seeger and
Kenyon were not immediately available for comment. A spokesman in the attorney
general's office declined to comment on whether any of the charges were dropped,
or whether the guilty plea was the result of a plea bargain. He said Ms.
McDermott is scheduled to return for sentencing in June.
Based in Phoenix, Security Trust Company manages
$13 billion in retirement and pension assets for about 2,300 retirement plans,
making it the largest of the independent trust companies. The U.S. Treasury
Department's Office of the Comptroller of Currency will force Security Trust to
be dissolved by March 31, 2004. The Securities and Exchange Commission
simultaneously filed civil charges against the former executives and Security
NY AG Eliot Spitzer filed felony charges against
Security Trust Co. N.A., (STC) accusing three former senior executives of
“pervasive misconduct” in helping in the late trading of mutual funds and the
“larceny” of more than $1 million. In addition, the SEC filed a civil suit
against STC and its executives and the US Treasury Department's Office of the
Comptroller of Currency (OCC) announced it had started efforts to dissolve STC.
The OCC announcement said that in October, it had forced STC's controlling
shareholder, Capital Management Investors Holdings, Inc., to provide a
capital infusion so that the company will have enough money to carry out an
orderly corporate dissolution.
late trading charges are only the tip
of a massive iceberg, they merely exposed the cancer
that has been festering for a long time -- toxic expenses yet fund
industry leaders don't think they did anything wrong!
- Senator Peter Fitzgerald, R-Ill., says funds are "the
world's largest skimming operation."
- Eliot Spitzer called it a "cesspool."
- Morningstar's Don Phillips said the industry "has lost its
- Former SEC chairman Arthur Levitt says "the ethical loss is
Expenses are a huge problem -
The industry skims a third off the top of average
fund's winnings. Even the past three years, as investors lost over 40 percent on
equity funds during the bear market, fund managers were giving themselves an
average 35 percent increase in pay.
How do they do it?
- By hiding transaction costs. Actively managed equity
funds currently report an average expense ratio in the range of 1.5 percent.
But that doesn't include transaction costs.
- Sales commission.
Most actively-managed funds are sold by brokers who get a commission in the
six percent range. Regardless of what they do or do not do, managers give the
broker a commission to hustle assets. So deduct at least 0.5 percent to
account for the annual impact of the commission.
- Cash drag.
Actively managed funds have much higher cash reserves than an index fund. The
effect of this "opportunity cost" or cash drag is a deduction of another 0.6
- Transaction costs.
Fund managers have lots of fun buying and selling stocks, playing big-shot
with your money. The typical turnover ratio is about 100 percent annually --
i.e., they're turning over their entire portfolio every single year.
- Management fees and expenses.
Now subtract another 1.5 percent for the reported fees and expenses that the
fund managers charge investors, including misleading 12(b)1 marketing fees.
But that's not all. Now Uncle Sam wants his cut of the profits in your taxable
accounts. And since that depends on an individual's bracket, it could be
anywhere up to 2.7 percent. But let's be ultra-conservative at 0.7 percent.
- Gross, pretax and after-tax investor
return. Let's suppose your fund is generating
a nice average gross annual return of 12 percent on total assets over the long
term. The commissions, costs, cash drag and fees reduce that to 8.7 percent
pretax. In short, the manager has already cost you 3.3 percent. Or to put it
another way, the fund is underperforming the market by 3.3 percent. After-tax,
what's left for the investor? No more than 8 percent of the original 12
percent is left. Less than two-thirds of your fund's returns get into your
pocket, probably much less.
Lately the news media has put most of the focus on the hot
breaking news about the latest indictments by the state attorneys general and
the SEC. Please don't be mislead - the real problem is expenses, and
unfortunately that message is being overshadowed by the indictments. Stay
focused ... or fund managers may rob you blind.
In fund prospectuses, the fees charged to investors are stated
as a percentage of assets. At around 1 percent a year, these costs look benign.
In dollar terms, however, the fees are staggering; some estimate >$35 billion
for the last 12 months or 0.86 percent of assets not including sales charges on
broker-sold funds. The fees fall into four groups. The largest is adviser fees,
which totaled $21 billion or 0.52 percent of assets. Other fees, including the
self-serving 12b-1 charges fund companies use to attract new money, totaled $9.2
billion, or 0.23 percent of assets. Shareholder servicing fees added $5.6
billion, or 0.14 percent, and custodian fees brought in $537 million, or 0.01
How Should Plan Fiduciaries Address Mutual Fund
Investigations and Allegations?
Plan fiduciaries who have responsibility for investments have an ongoing
obligation to monitor the funds offered as investment options under their plans
and to decide whether these funds should be kept or removed. Although what
constitutes a prudent review is determined by the specific facts and
circumstances, here are some practical steps that may help to show that plan
fiduciaries have acted prudently.
- Hold an Investment Review Meeting: Depending on how often regularly
scheduled meetings are held regarding plan investments, a special meeting may
be in order.
- Gather Information and Consider Alternatives: Determining whether
to retain a fund involves many considerations. Plan fiduciaries should educate
themselves on the issues and should not be afraid to ask questions. For
example, fiduciaries may wish to contact their plan investment advisors for
advice regarding the effect of the recent mutual fund allegations on the funds
offered under their plans even if these funds have not been identified in the
press. Fiduciaries should then evaluate available alternatives and decide what
actions are needed, if any.
- Document Each Step: Fiduciaries should be sure to keep good records
regarding information received, meetings held, and actions taken in response
to the recent mutual fund allegations. This kind of documentation can help
protect fiduciaries from liability.
- Inform Participants: Fiduciary litigation often involves claims
that adequate information was not communicated to participants. Fiduciaries
should carefully consider the extent to which their duty of loyalty and the
disclosure provisions of ERISA Section 404(c) may require them to inform
participants about the current issues of late trading and market timing and
what the plan fiduciaries are doing to address the issues.