In addition to the charges against NCC and JBOH, the Commission's complaint names James G. Lewis, age 39, of Santa Monica, Calif., who was JBOH's former president and chief operating officer and NCC's former president and chief executive officer; Kraig L. Kibble, age 44, of La Crescenta, Calif., who is NCC's director of operations; and James Y. Lin, age 46, of Rancho Palos Verdes, Calif., who is NCC's vice president of correspondent services.
Stephen M. Cutler, the SEC's Director of Enforcement, stated, "Our investigations of late trading and abusive market timing have implicated not only traders and mutual fund advisers but also financial intermediaries. As today's action demonstrates, we will hold accountable all those market participants - including their management - who engage in or facilitate conduct that harms the investing public."
Randall R. Lee, Regional Director of the SEC's Pacific Regional Office in Los Angeles, added, "When clearing firms illegally permit their customers to trade mutual funds using special access to after-hours trading and conceal their customers' market timing activities from mutual funds by developing deceptive tactics to continue the impermissible trading, they violate the federal securities laws and will be prosecuted."
The SEC's complaint, filed in United States District Court in Los Angeles, alleges as follows:
- "Late trading" refers to the practice of placing orders to buy or sell mutual fund shares after 4:00 p.m., eastern time, the time as of which mutual funds typically calculate their net asset value (NAV), but receiving the price based on the NAV already determined as of 4:00 p.m. Late trading enables the trader to profit from market events that occur after 4:00 p.m. but that are not reflected in that day's price.
- "Market timing" includes (a) frequent buying and selling of shares of the same mutual fund or (b) buying or selling mutual fund shares in order to exploit inefficiencies in mutual fund pricing. Market timing, while not illegal per se, can harm other mutual fund shareholders because it can dilute the value of their shares, if the market timer is exploiting pricing inefficiencies, or disrupt the management of the mutual fund's investment portfolio and cause the targeted mutual fund to incur costs borne by other shareholders to accommodate frequent buying and selling of shares by the market timer.
- From June 2002 until September 2003, NCC facilitated thousands of late mutual fund trades in more 600 different mutual funds on behalf of select institutional customers. NCC routinely received trading instructions from customers after 4:00 p.m., eastern time, and executed those trades at the current day's NAV. NCC facilitated the late trading with the knowledge and at the direction of Lewis, Kibble, and Lin.
- NCC entered into written agreements with institutional customers who engaged in late trading and market timing. These agreements included up to a 1% custodial fee in exchange for facilitating market timing and late trading in mutual funds. NCC received approximately $1 million in compensation from the scheme while its customers reaped profits in excess of $8 million at the expense of long-term mutual fund shareholders.
- NCC received hundreds of "kick-out letters" from various mutual funds which rejected individual market timing trades and attempted to restrict NCC's customers' ongoing market timing activities. In response to these restrictions, NCC perpetrated a number of deceptive practices to conceal their customers' fraudulent market timing. When a mutual fund restricted market timing activities, NCC, at the direction of Lewis, Kibble, and Lin, used deceptive means such as opening additional accounts and using new account numbers instead of the previously restricted account numbers; using additional registered representative codes for the same previously restricted representatives; and using additional office identification numbers for the same previously restricted offices.
- JBOH reported its financial statements included within its Forms 10-Q and 10-K on a consolidated basis. Therefore, JBOH reported as revenues the proceeds NCC received from the fraudulent scheme. Lewis served simultaneously as an executive at JBOH and NCC and signed JBOH's 2002 and 2003 Forms 10-K.
The Commission's complaint charges JBOH, NCC, Lewis, Kibble, and Lin with violating the antifraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. NCC is also charged with violating Rule 22c-1, promulgated under Section 22(c) of the Investment Company Act of 1940. This provision prohibits the purchase or sale of mutual fund shares except at a price based on the current NAV of such shares that is next calculated after receipt of a buy or sell order. The SEC seeks an order that permanently enjoins the defendants from future violations of the above provisions; requires the defendants to disgorge all their ill-gotten gains plus prejudgment interest; requires the defendants to pay civil penalties; and prohibits Lewis from serving as an officer or director of a public company.<
