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Attorney General Andrew M. Cuomo today announced a settlement resolving an investigation of hedge fund Ritchie Capital Management’s late trading of mutual fund shares.
Under the terms of the agreement, the hedge fund - Ritchie Capital Management, L.L.C. and Ritchie Capital Global Trading, Ltd., will pay nearly $37.5 million in restitution, disgorgement and interest to affected mutual funds and $2.5 million in civil penalties. Ritchie Capital Management separately also agreed to adopt significant reforms and corrective measures to ensure future compliance with securities laws.
"This agreement ensures that wrongdoers are held responsible, appropriate reforms are adopted, securities laws are honored and long-term investors are assured a level playing field," said Attorney General Cuomo.
The investigation revealed that from 2001 through 2003, Ritchie Capital in concert with certain broker dealers such as Trautman Wasserman, CIBC Oppenheimer, Bear Stearns and Prudential engaged in late trading, purchasing and selling mutual fund shares after the 4 p.m. close of the markets. Using a complicated model to analyze post-closing information and predict how the market would react on the next trading day, Ritchie Capital purchased and sold mutual funds at pre-close prices based on post-close information.
Additionally, the investigation revealed that Ritchie Capital and participating broker-dealers used deceptive techniques to conceal illicit late trading activities. Ritchie Capital submitted mutual fund trade sheets listing every conceivable variation of trades before the 4:00 p.m. EST trade cut-off. The mutual fund trade sheets were time stamped to indicate they were received before the markets closed. Following the 4:00 p.m. close, depending on the available information, Ritchie Capital called participating brokers-dealers to confirm, cancel or modify the trade sheets. The broker-dealers then executed any trades Ritchie Capital wanted to initiate and simply threw out the rest of the trade sheets.
The investigation uncovered several telephone conversations between Ritchie Capital employees and brokers establishing Ritchie Capital’s use of post closing information to make decisions and attempts to conceal the late trading activities.
Cuomo thanked the Chicago Regional Office of the SEC for its participation in the investigation.
Ritchie Capital Management LLC., is based in Illinois and Ritchie Capital Global Trading, Ltd. is a master feeder fund existing under the laws of the Cayman Islands.
The Ritchie Capital settlement was handled by Assistant Attorney General Peter Dean under the supervision of Executive Deputy Attorney General for Economic Justice Eric Corngold.
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