The SEC brought a suit against two former Morgan Stanley DW, Inc. (MSDW) financial advisors, Darryl A. Goldstein and Christopher O'Donnell, for allegedly engaging in a fraudulent market timing scheme. "Market timing" refers to the practice of short term buying, selling, and exchanging of mutual fund shares in order to exploit inefficiencies in mutual fund pricing.
The SEC alleges that Goldstein and O'Donnell engaged in a number of deceptive practices to defraud at least 50 mutual fund companies and their shareholders by circumventing the funds' restrictions on market-timing. The conduct allegedly occurred from January 2002 until August 2003 and generated approximately $1 million in net commissions or asset-based fees for the defendants. The SEC further alleges that, in response to market-timing trades by Goldstein and O'Donnell for their hedge fund customers, mutual fund companies sent MSDW at least 225 "block letters" that barred or restricted trading by Goldstein, O'Donnell, or their customers.
According to the SEC, Goldstein and O'Donnell, in an effort to circumvent mutual funds' market-timing restrictions and conceal their hedge fund customers' ongoing market-timing trading, repeatedly and systematically employed a variety of deceptive practices including, but not limited to, opening and trading in multiple brokerage accounts, trading using different financial advisor identification numbers, and trading through variable annuity contracts.
The SEC alleged that 11 different FA identification numbers were used, and that they opened approximately 122 brokerage accounts and 64 variable annuity contracts, and placed more than 4,000 market-timing trades totaling over $4.8 billion in trading volume, in less than two years for only two hedge fund customers.
Please click http://www.sec.gov/litigation/complaints/2007/comp20403.pdf for a copy of the administrative order.