LV figure in fund scandal loses round against SEC

Kevin Rademacher

Tuesday, Aug. 10, 2004 | 10:55 a.m.

A Las Vegas securities broker accused in a government lawsuit of scheming to defraud mutual fund investors nationwide failed Monday to have the complaint dismissed.

In December the Securities and Exchange Commission filed a complaint against Daniel G. Calugar and his firm, Security Brokerage Inc., alleging that he made $175 million through improper late and market-timing trades in mutual funds managed by Alliance Capital Management and Massachusetts Financial Services.

Federal regulators also received a restraining order against Calugar, freezing his assets.

His motion to dismiss the complaint was rejected Monday by U.S. District Court Judge Robert C. Jones.

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.

In Wednesday's hearing, Calugar's attorney Steven Scholes said that submitting orders after the market close is not illegal and that the fund managers should have insured that the proper trading price was recorded.

"That is the mutual fund's responsibility to price these funds and price them correctly," Scholes said. "That is not the responsibility of (Security Brokerage)."

Jones, however, countered that the SEC also alleges that Calugar manipulated the orders to make it appear that they occurred prior to market close.

Scholes said: "Security Brokerage has nothing to do with pricing."

Jones responded: "They have everything to do with characterizing when a trade was made."

In arguments Wednesday, it appeared that the SEC could have a more difficult case proving fraud involving market timing.

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.

Scholes said that the SEC complaint even concedes that market timing is not illegal. It also acknowledges that Alliance only discouraged but did not prohibit the practice.

He said that Calugar had to seek out permission from fund managers to make the transactions. He was then told he would need to invest in the hedge funds in return for the privilege.

"He's dealing with the people that make the rules," Scholes said. "Where else does he go? ... I would say that's the upstanding thing to do."

While the judge acknowledged the argument, he said there are still limits.

"You can't conspire to commit fraud," he said.

SEC attorney Karen Matteson said that Calugar was manipulating the system with a trading advantage that was not available to all individuals. Her remarks were cut short by the judge, who stepped in to deny Calugar's motion.

Calugar, who was present for the hearing, declined to comment on the allegations.