- The Washington Times - Tuesday, December 9, 2003

NEW YORK (AP) — A former senior executive at Security Trust Co. pleaded guilty yesterday to charges that she facilitated illegal mutual fund trading in a scheme that cost investors millions — the latest admission of wrongdoing in an industrywide scandal.

The plea by Nicole McDermott comes two weeks after New York Attorney General Eliot Spitzer and the Securities and Exchange Commission accused her, along with two other top executives, of stealing millions of dollars worth of fund shares by engaging in unlawful trading.

Regulators charged McDermott, a former senior vice president, and former Chief Executive Officer Grant D. Seeger and former President William Kenyon with grand larceny, falsifying business records and securities fraud. According to the complaint, hedge funds that placed improper orders made $85 million in profits, while Security Trust made $5.8 million.

Security Trust, which processes mutual fund trade orders for pension plans and retirement systems, was not charged because the U.S. Treasury Department’s Office of the Comptroller of Currency exercised regulatory powers that allowed it to order the trust dissolved by March 31.

As part of her plea, McDermott, who faces up to four years imprisonment, admitted to directing Security Trust employees to place numerous orders for mutual fund shares for two hedge funds after 4 p.m. Eastern time, when the market had closed. It is illegal to trade fund shares after the market’s close.

Authorities said she did this by disguising the source of the trades. One method involved leading mutual funds to believe that the trades were orders from one of Security Trust’s client-retirement plans.

A statement from Mr. Spitzer’s office did not identify the hedge funds McDermott helped. Security Trust previously had been linked in court papers to Canary Capital LLC, the hedge fund operator that agreed in September to pay $40 million to settle New York state regulators’ charges of improper trading.

Since then, regulators have issued dozens of subpoenas, and fund complexes ranging from Putnam Investments, Strong Financial and Alliance Capital Management have acknowledged that improper trading occurred.

In those cases, the trading involved market timing, a type of quick, in-and-out transaction that is not illegal but restricted by most funds because it skims profits from long-term shareholders.

Authorities have said funds that officially limited short-term trading, but made selective exceptions, committed fraud.


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