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SEC Charges JB Oxford With Fraud

The civil suit against the Beverly Hills brokerage is the latest move in the federal effort to stamp out illegal fund trading.

August 26, 2004|Tom Petruno | Times Staff Writer

Federal regulators on Wednesday charged a Beverly Hills-based brokerage and three of its executives with securities fraud, alleging that the company arranged for clients to engage in market timing or late trading of more than 600 mutual funds.

The Securities and Exchange Commission's civil suit against JB Oxford Holdings Inc. is the latest case in a year-old campaign to stamp out fraudulent fund trading.

The suit also is the latest run-in that Oxford has had with authorities. Under previous management, the firm processed trades for three notorious "boiler-room" brokerages in the 1990s.

In its complaint, the SEC says Oxford's processing unit, National Clearing Corp., earned almost $1 million from June 2002 to September 2003 for arranging fraudulent market-timing and late-trading fund transactions for institutional clients.

Market timing refers to lightning-fast trades to exploit short-term market moves. Late trading is the acceptance of orders after markets close.

When some mutual fund companies tried to stop Oxford's trades from getting through because they violated the funds' rules, Oxford executives opened new accounts to try to disguise the trades, in a procedure the executives referred to as cloning, the suit says.

"We continually look for ways to increase the [trade] executions and decrease the restrictions" imposed by fund companies, an Oxford executive told a client in a June 2003 e-mail, according to the suit.

The SEC alleges that Oxford and three current or former executives -- James G. Lewis, Kraig L. Kibble and James Y. Lin -- committed securities fraud. The suit, filed in U.S. District Court in Los Angeles, seeks unspecified financial penalties.

Attorneys for Oxford, Kibble and Lin didn't return phone calls. Lewis' attorney, Matthew Dontzin, said his client would "vigorously defend" himself. Lewis quit the firm in April.

Christopher Jarratt, Oxford's chief executive, didn't return a call for comment. He led an investor group that bought Oxford in 1998. He wasn't named in the SEC suit.

The case echoes more than a dozen others that have been filed since New York Atty. Gen. Eliot Spitzer stunned the fund industry Sept. 3 with allegations of widespread trading abuses.

Oxford was named in Spitzer's complaint but not charged. Spitzer said Oxford processed trades for Canary Capital Management, a hedge fund that was the first investor named in the fund scandal.

In most of the cases since Spitzer's announcement, regulators targeted fund companies that allegedly permitted improper trading in return for other fee-generating investments from the favored clients.

The Oxford case represents a separate effort by authorities to go after financial intermediaries that allegedly facilitated improper trading. Many institutional investors and fund companies rely on clearing operations like Oxford's to be the conduit for fund transactions.

"As today's action demonstrates, we will hold accountable all those market participants -- including their management -- who engage in or facilitate conduct that harms the investing public," said Stephen M. Cutler, the SEC's director of enforcement in Washington.

In suing Oxford, the SEC is targeting a company that now is a shell: In the wake of regulators' probes of the company, management sold Oxford's discount brokerage unit in June, and this week the company agreed to sell its clearing operation.

In the suit, the SEC says certain clients agreed in writing to pay Oxford a fee as much as 1% of the assets involved in return for the market-timing and late-trading transactions it handled.

Market timing isn't illegal, but many fund companies have tried to stop such trading because it can be disruptive to funds and hurt buy-and-hold investors by raising portfolio costs.

Late trading is illegal, as it involves investors entering trades after the market has closed -- something akin to placing bets on horses after the race is over. In a typical scenario, a late trader would try to capitalize on news that breaks after the close to gain an advantage over investors who would have to wait for the next day's trading to begin.

In May 2002, Lewis, then Oxford's president, began negotiating to open two accounts worth $5 million each with an unidentified Swiss money manager, the SEC suit claims. It says that in a meeting with Lewis, the money manager's London-based investment advisor "expressed an interest in late trading."

After the meeting, Lewis directed Kibble, the head of operations at Oxford's clearing unit, to look into how late Oxford could submit fund trades to a centralized transaction processor, according to the suit. The cutoff, Kibble learned, was 6:50 p.m. Eastern time.

Fund companies have long been willing to accept trades after the 4 p.m. market close, to allow for processing time. But brokerages are supposed to guarantee that any trades submitted after 4 p.m. were received from their investors during normal market hours.

Oxford agreed to submit client trades it received after 4 p.m., the SEC said.

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