Vice fund firm charged in trading scandal

(December 5, 2003) A U.S. company best known for marketing a “socially irresponsible” mutual fund focusing on sin stocks has been caught up in the recent regulatory crackdown on trading abuses. Dallas-based Mutuals.com, its chief executive officer, president and compliance officer have been charged with fraud by the U.S. Securities and Exchange Commission (SEC).

The securities regulator accuses Mutuals.com of deceiving hundreds of fund companies and shareholders by helping institutional brokerage customers and advisory clients carry out thousands of market-timing trades and illegal late trades.

The SEC alleges that in 2003, Mutuals.com and its two affiliated broker-dealers routinely received trading instructions from customers after 4 p.m. and executed those trades as if the instructions had been received prior to that closing time.

The firm attempted to conceal the late-trading activities by omitting portions of the trading information that they were required to provide to clearing agents, the SEC said in its statement of allegations.

“The defendants used a whole host of methods to try to mask their illegal market timing and late trading,” said the SEC’s enforcement director, Stephen Cutler, in a statement. “These efforts at concealment illustrate the lengths to which the defendants were willing to go to continue enriching themselves at the expense of long-term mutual fund investors.”

The SEC wants the company to pay fines and give up its illegal profits, estimated at nearly $5 million US. Mutuals.com has agreed that a court-appointed monitor will oversee its activities until the case is resolved.

Mutual.com’s Vice Fund — launched in August 2002 — invests in gambling, alcohol, tobacco and defence stocks. Its one-year rate of return topped 17%, beating both the S&P 500 and the Dow Jones Industrial Average.

“We’ve always said that no matter what the economy’s doing, people drink smoke and gamble, and unfortunately, there’s always a need for defence contractors,” said Mutuals.com president Eric McDonald in an October press release.

McDonald, who co-manages the fund, is among those charged by the SEC. The fund is not mentioned specifically in the SEC’s statement of allegations.

Mutuals.com is the ninth company to face accusations since U.S. regulators began investigating the fund industry three months ago. The Ontario Securities Commission has launched its own probe of Canadian fund companies, but so far there has been no indication of similar trading abuses.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com