LV broker charged in fund scandal

Kevin Rademacher

Wednesday, Dec. 24, 2003 | 11:02 a.m.

A Las Vegas securities broker has been charged with scheming to defraud mutual fund investors.

The Securities and Exchange Commission this week filed a lawsuit in U.S. District Court in Las Vegas alleging that Daniel G. Calugar, president and majority owner of Security Brokerage Inc., made $175 million through improper late and market-timing trades in mutual funds managed by Alliance Capital Management and Massachusetts Financial Services.

U.S. District Court Judge Robert Clive granted the SEC's request for a temporary restraining order, freezing Calugar's assets. A Jan. 5 hearing has been ordered on the the SEC's request for a permanent injunction.

Federal regulators asked the court for emergency relief after learning that on Dec. 18 Calugar had transferred $50 million of the proceeds of his scheme out of Massachusets Financial Services, an SEC statement said.

"This transfer occurred on the same day that the commission instituted an enforcement action against Alliance in connection with market timing activity," the statement said. "The commission's action against Alliance identified Calugar as the largest market timer at Alliance."

Calugar could not be reached for comment.

His firm, which had an office at 3960 Howard Hughes Parkway, was incorporated in 1996, documents on file with the National Association of Securities Dealers said. Calls to the office this morning could not be connected. A month ago, a recorded message indicated that the firm had shut down.

Nevada Securities Division records showed that the company had no history of disciplinary action and that it voluntarily terminated its broker license on October.

The company asked the SEC to terminate its license in September.

The SEC describes late trading as the practice of placing orders to buy or sell mutual fund shares after the market closes, but at the closing price. The practice allowed traders to profit from market events that occur after the close but that are not reflected in the price.

The lawsuit charges that Security Brokerage manufactured false internal documents to show that late trades occurred minutes before the market closed.

Market timing is the practice of making short term trades in mutual funds, a practice either discouraged or prohibited in the prospectus of the funds with which Security Brokerage was involved. The SEC lawsuit said Calugar gained access for market timing trades by agreeing to make long-term investments -- known as sticky assets -- in hedge funds operated by Alliance.

"Calugar's market timing and late trading were phenomenally profitable to him and came at the expense of long-term mutual fund shareholders," said Randall Lee, director of the SEC's Pacific Regional Office. "By obtaining a court order freezing Calugar's assets, the commission has taken action to preserve funds to be returned to the victims of his illegal schemes."