J.B. Oxford Holdings Inc., the Beverly Hills-based brokerage with a history of scandal, resolved its latest legal run-in Wednesday when its trade-processing unit agreed to pay $2.1 million to settle civil fraud charges stemming from abusive mutual fund trading, regulators said.
J.B. Oxford subsidiary National Clearing Corp., which executed trades for other brokerages, will pay a penalty of $1 million and give up $1.1 million in improper fees collected from clients that engaged in late trading and market timing thousands of times, the Securities and Exchange Commission said.
J.B. Oxford, which sold off its main operations in 2004 as regulators closed in, did not return calls seeking comment.
Also settling were three former National Clearing executives: James G. Lewis, 40, of St. John, Virgin Islands, who was chief executive; Kraig L. Kibble, 45, of Washington, who was director of operations; and James Y. Lin, 46, of Rancho Palos Verdes, who was vice president of correspondent services.
Lewis agreed to pay a $200,000 fine and be barred from working in the brokerage industry or as an officer or director with a public company for five years; Kibble agreed to a $50,000 fine and a four-year ban from the brokerage business and Lin agreed to a $35,000 fine and a three-year ban from the brokerage industry.
None of the defendants admitted or denied wrongdoing.
"Mr. Lin is pleased to put this matter behind him and get on with the rest of his life," said his lawyer, Susan Brune.
Attorneys for Lewis and Kibble could not be reached.
J.B. Oxford, which in 2000 settled a probe by federal prosecutors over its ties to notorious Canadian stock promoter Irving Kott, also agreed to stay out of the trade-processing business for five years.
"Given J.B. Oxford's history, we thought that was an appropriate measure," said Michele Wein Layne, associate director of the SEC's Los Angeles office.
The SEC alleged in its August 2004 suit that National Clearing enabled certain clients to make illegal trades in more than 600 funds from June 2002 to September 2003, taking fees in return.
Most mutual funds are priced once daily, at 4 p.m. Eastern time, and after-the-bell orders are supposed to be processed at the next day's prices, but late traders get stale prices that can be exploited. For example, if foreign markets are rising after the U.S. market has closed, late traders might buy shares of a foreign fund at the stale price and sell them the next day at a profit.
National Clearing also allegedly let clients engage in market timing, or rapid in-and-out fund trading aimed at capturing small gains. Market timing is not illegal in itself, but most funds discourage or bar the tactic. National Clearing used "deceptive practices" to conceal its customers' market timing, the SEC alleged.
Timing and late trading hurt ordinary fund investors, regulators say, by diluting share values and driving up costs borne by all. Regulators started cracking down on the practices in September 2003.