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Schwab Settles Late-Trading Case With SEC

The brokerage firm pays a $350,000 civil fine and agrees to strictly follow rules for processing orders.

September 15, 2004|From Associated Press

Brokerage Charles Schwab & Co. has agreed to pay a $350,000 civil fine to settle federal regulators' allegations that it illegally allowed certain customers to change mutual fund trade orders after the market's close.

The settlement with the Securities and Exchange Commission announced Tuesday makes Schwab the first major discount brokerage to be penalized in the mutual fund trading scandal. In the last 12 months, several major fund companies -- including Alliance Capital Management and Bank of America Corp. -- have paid hundreds of millions of dollars to settle improper-trading charges. Fund executives, managers and traders also have been accused of wrongdoing.

However, the fine being paid by San Francisco-based Schwab is relatively small. SEC officials noted that the Schwab case was different from others in which mutual funds made special deals with favored customers that allowed them to engage in improper trading.

The SEC said it found no evidence of "improper agreements with customers" in the Schwab case or schemes to exploit the order process. Rather, the regulators said, they had discovered a potential problem in the fund trading system and were seeking to prevent it from occurring elsewhere.

Schwab neither admitted nor denied wrongdoing in its settlement with the SEC, although it did promise to refrain in the future from allowing illegal after-hours trading.

Starting in January 2001 or earlier, the SEC said, Schwab improperly allowed some customers that manage mutual funds to change their trading orders after the 4 p.m. Eastern stock market close and still receive that day's fund price -- in violation of securities rules. That way, the agency said, the favored customers were able to capitalize on late-breaking news at the expense of individual and retail fund investors.

Schwab, in a statement, said the transactions in question represented only several hundred of the more than 34 million mutual fund trades the brokerage executed during the three-year period. The company said that since the problems were discovered, it had tightened its oversight of fund order processing.

On Tuesday, shares of Schwab's parent, Schwab Corp., fell 5 cents to $9.64 on the New York Stock Exchange.

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