The SEC has announced a USD 180 million settlement in its charges against Millennium Partners, L.P. and management including Israel Englander.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
The SEC had filed administrative charges against Millennium Partners, L.P. Millennium Management, L.L.C., Millennium International Management, L.L.C., Israel Englander, Terence Feeney, Fred Stone, and Kovan Pillai for their participation in a fraudulent scheme to market time mutual funds.
The respondents will pay over USD 180 million in disgorgement and penalties and undertake various compliance reforms to prevent recurrence of similar conduct.
The Commission's Order finds that from at least 1999 to 2003, the respondents generated tens of millions of dollars in profits for Millennium by engaging in deceptive market timing. Englander, Feeney, Stone and Pillai knew that mutual funds sought to detect market timers and frequently blocked Millennium's trades and, therefore, devised and carried out various fraudulent means to conceal Millennium's identity and thereby avoid detection and circumvent restrictions that the mutual funds imposed on market timing.
Linda Chatman Thomsen, Director of the Division of Enforcement, said, "(This) action demonstrates the Commission's commitment to prosecute vigorously all the wrongdoers involved in fraudulent market timing practices, not just mutual fund managers and broker-dealers, but also the hedge funds and other entities that profited so handsomely from the fraud."
Mark K. Schonfeld, Director of the Commission's Northeast Regional Office, added, "The substantial disgorgement and civil penalties imposed on the respondents underscore how seriously the Commission views hedge funds' roles in deceptive market timing schemes and demonstrate to the investing public that beneficiaries of market timing fraud will not be permitted to retain their ill-gotten gains."
Specifically, the Commission Order finds that Millennium, through its senior management, including Englander, Feeney and Stone, and one of its traders, Pillai, engaged in the following conduct:
· Millennium created approximately 100 new legal entities, with unrelated names, to hide its identity thereby enabling it to execute market timing trades in mutual fund shares without detection by the mutual fund families. The entities opened over 1,000 accounts at various brokerage firms in order to further conceal the fact that Millennium's market timing was being conducted by the same entity.
· Millennium also engaged in market timing trading through variable annuity contracts, employing a number of deceptive practices to avoid detection as a market timer. For example, in certain applications for annuity contracts, Millennium employees misleadingly represented that the annuities were suitable for the employees' long term investment strategy or for their retirement investment plans when Millennium intended to use the annuity contracts for solely market timing purposes.
· Because mutual funds attempted to identify market timers by tracking registered representative numbers, Millennium used brokers with multiple registered representative numbers in order to evade certain mutual funds' market timing restrictions.
· Millennium used a variety of other methods to avoid detection by the mutual funds, including (i) breaking up large trades into several smaller trades, (ii) leaving small positions when trading out of a mutual fund to avoid raising the mutual fund's suspicions, and (iii) using clearing brokers who aggregated trades in omnibus accounts that concealed the identities of the individual entities making the trades. These structured trading and omnibus account trading strategies were specifically intended to hide Millennium's market timing activities from mutual funds that sought to prohibit Millennium's market timing.
· Millennium, with Englander and Feeney's knowledge and approval, deployed "sticky" assets, through broker-dealers, to obtain timing capacity that the brokers had negotiated with the mutual funds.
The Commission's Order finds that by engaging in the fraudulent scheme summarized above and described in the Order, the respondents willfully violated Section 17(a) of the Securities Act or 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.
Without admitting or denying the Commission's findings, the Respondents have consented to an Order that: (1) requires the Respondents to cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; (2) prohibits Englander, Feeney, and Stone from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter for a period of three years; (3) denies Stone the privilege of appearing or practicing before the Commission as an attorney for six months; and (4) suspends Pillai from association with any investment adviser for a period of 12 months.
The Order also requires the Respondents to pay disgorgement and civil penalties as follows: (1) Millennium Partners: USD 121.4 million in disgorgement; (2) Millennium Management and Millennium International Management, jointly and severally: USD 26.6 million in disgorgement; (3) Englander: a USD 30 million penalty; (4) Feeney: a USD 2 million penalty; (5) Stone: a USD 25,000 penalty; and (6) Pillai: a USD 150,000 penalty.
The money will be placed in a Fair Fund for distribution to victims. Further, Millennium must comply with certain undertakings, including the retention of an Independent Compliance Consultant to review its compliance program and the establishment of a Compliance, Legal, and Ethics Oversight Committee to ensure that Millennium's illegal conduct does not recur.
The Commission's action was brought contemporaneously with a related action by the Attorney General of the State of <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />New York, and the Commission acknowledges the assistance of the Attorney General in this matter.