Zurich Capital Markets Inc. ("ZCM") settled administrative charges brought by the SEC for allegedly financing illegal market timing by hedge funds. The SEC stated that ZCM played a role in providing financing to hedge fund clients that engaged in market timing of mutual funds and facilitating the hedge funds' deceptive trading tactics.
Specifically, the SEC found that ZCM aided and abetted four hedge funds that were carrying out schemes to defraud mutual funds that prohibited market timing. ZCM's hedge fund clients knew that many of these mutual funds prohibited market timing. In an effort to avoid being detected and potentially blocked from making market-timing trades in these funds, each of these hedge funds and ZCM disguised their identities. For example, ZCM created seemingly unaffiliated SPVs in whose name multiple brokerage accounts were opened, thus enabling ZCM's hedge fund clients to disguise their identities and market time mutual funds.
The SEC order found that ZCM profited from the fees it received from the business of providing derivative financing to hedge funds engaging in a mutual fund market-timing strategy. As a result, the SEC's Order found that ZCM willfully aided and abetted and caused violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.
The SEC ordered ZCM, a New York-based subsidiary of Zurich Financial Services, to pay $16.8 million, consisting of $12.8 million in disgorgement and prejudgment interest and a $4 million penalty.
Please click http://www.sec.gov/divisions/investment/noaction/2007/gsam031307-3c7.htm to access a copy of the no-action letter.