Fund timers

Discussion in 'Trading' started by Kicking, Feb 21, 2004.

  1. Can anyone still trade mutual funds these days? What are people like Gary Smith -who trades mostly mutual funds- doing now? I can see why regulators need to crack down on late trading but there isn't anything wrong with market timing if the fund allows it. Is that becoming illegal too?

    Here is an interesting story from the LA Times:

    An Investor's Riches Under Scrutiny
    Regulators accuse Dan Calugar of making at least $175 million from improper trading in mutual fund shares, more than anyone else.
    By Josh Friedman
    Times Staff Writer

    February 21, 2004

    The last time Dan Calugar found himself in the public eye, it was because of a 37-line personal ad he placed in a 1994 issue of New York magazine.

    "Successful Investor Looking to Marry," it read. "If you introduce me to the woman I marry, I will pay you $100,000. She could be your daughter, your best friend or just an acquaintance." The gambit failed to snare Calugar a bride, but it did land him about 2,000 responses and a spot on a CBS TV show featuring millionaire bachelors.

    Now, Calugar is courting something else: intense scrutiny from federal regulators.

    The 50-year-old Calugar may have reaped more money than any other individual in the mushrooming mutual-fund trading scandal — at least $175 million in illicit profits, authorities say.

    "It is hard for the ordinary investor to fathom just how much money Calugar made through his illegal trading," said Randall R. Lee, regional director of the Securities and Exchange Commission's Los Angeles office.

    "Although we know that he made at least $175 million, we haven't ruled out the possibility that that number will grow," Lee said, "and we are still vigorously investigating the full scope and magnitude of his activity and of the harm he caused to mutual fund shareholders."

    Calugar, who owns a luxury high-rise condominium in West Los Angeles and a home in Las Vegas, declined to comment for this article. His lawyer, Scott Frewing of Baker & McKenzie in Palo Alto, also declined to comment.

    The SEC filed a civil suit against Calugar on Dec. 23 seeking undetermined fines and restitution, and the agency obtained a court order freezing his business and personal assets.

    Calugar [pronounced kuh-LOO-ger] ran his trading operation from a company called Security Brokerage Inc. of Las Vegas, which federal investigators believe existed only as a vehicle for his personal investments. He has been named prominently in state and federal actions alleging that three large fund companies — Alliance Capital Management of New York, Massachusetts Financial Services Inc. of Boston and Franklin Resources Inc. of San Mateo, Calif. — allowed improper trading by a handful of favored investors.

    Dozens of mutual fund investigations are being conducted. Of the investors identified so far, Calugar is alleged to be one of the two most active, engaging in "market timing" and other practices.

    The other investor is Edward Stern, whose hedge fund, Canary Capital Partners, settled charges of improper trading brought by New York Atty. Gen. Eliot Spitzer on Sept. 3. Canary agreed to return $30 million in profits and pay a $10-million fine, but did not admit wrongdoing.

    Authorities say Canary's total profits have not been determined. Calugar, whom one fund industry consultant nicknamed "Canary West," had an estimated half-billion dollars in action, regulators say.

    Market timing is a practice in which traders move money in and out of stock funds at a furious pace, exploiting slight price moves to make quick profits. In return for the chance to market-time, traders such as Calugar are alleged to have promised millions of dollars in long-term fund investments, which can earn lucrative fees for the fund companies.

    Regulators say market-timing hurts other fund investors, partly because they help shoulder the timers' transaction costs without seeing any of the profits. Most funds either bar the practice or say they strongly discourage it.

    The SEC's civil suit alleges Calugar defrauded investors through his market-timing practices and by making illegal after-the-bell fund trades without the consent of the fund companies. He has until March 10 to respond to the SEC's complaint.

    Mutual funds, which are investments in a group of stocks or bonds, are priced once daily at 4 p.m. Eastern time. Orders to buy or sell fund shares received after 4 p.m. are supposed to be processed at the next day's closing price. Calugar forwarded orders to a fund transaction clearinghouse as late as 6 p.m. with false time stamps reading 3:59 p.m., the SEC alleges.

    Public records, court documents and interviews with acquaintances suggest that Daniel George Calugar is a driven entrepreneur.

    Born in Warren, Ohio, on New Year's Day 1954, Calugar was a successful tax attorney before he turned his full attention to investing. Calugar's teachers and peers at the University of Florida's law school in Gainesville during the late 1970s remember him as smart and studious.

    "He had an extraordinary work ethic, even by the compulsive standards of first-year law students," said friend and classmate Kendall Coffey, a former U.S. attorney in South Florida who is in private practice.

    "He was often here studying late at night and early in the morning," said professor Dennis Calfee, who taught Calugar in the university's graduate tax program as well as its law school.

    They also remember the clean-cut, dark-haired Calugar as a disciplined exercise buff.

    "The image I have is Dan running full speed down 13th Street [near campus] with a barbell in each hand," Coffey said. "He was an avid fitness advocate well before it became cool and widespread. I don't know what he looks like now, but at the time he could have given Arnold Schwarzenegger a run for his money."

    After graduating in 1979 near the top of his law school class, Calugar joined the Atlanta firm Hansell & Post, making partner in 1986 at age 32 and staying on when it became part of the behemoth Jones, Day, Reavis & Pogue. Calugar was divorced in 1989, and by the time he moved to Manhattan's swanky West 57th Street after 12 years in the Atlanta area, he had made the transition from lawyer to investor.

    "I no longer practice law, as I spend my full time managing my personal investments, which earn me over $5 million a year," Calugar wrote in his 1994 personal ad in New York magazine. "I work only for myself, so I enjoy a lot of personal freedom. My hobbies include scuba diving and snow skiing. I love travel, fine dining, theater, good entertainment and exotic cars."

    Calugar moved to Las Vegas in 1996, setting up shop as Calugar Corp. and renaming it Security Brokerage two years later. Calugar told a representative of Massachusetts Financial Services that he did not have any clients, saying instead he was investing "family money" and "our money," according to a deposition from a sales representative at the fund firm.

    Massachusetts Financial is suing Calugar for more than $111 million in profits it alleges he obtained fraudulently through what the company says was improper trading in its funds. He also is the target of several shareholder class-action suits.

    The SEC claims Calugar netted a total of $175 million from improper trading at MFS and Alliance from 2001 to 2003. The Franklin mutual fund company, however, said in a separate court filing that Calugar lost $700,000 from his trades there.

    Calugar bought a condo last spring at the Remington high-rise on Wilshire Boulevard near UCLA, records show. Property records also indicate Calugar owns a $1.7-million, four-bedroom home in the Spanish Trail estates in Las Vegas.

    Documents suggest Calugar's market timing may have dated to his Atlanta days, well before the issue hit the spotlight last fall.

    "I have been an active investor in timing mutual funds for 15 years," Calugar wrote to an Alliance Capital representative in April 2001, according to a copy of the letter included in the SEC complaint against Alliance.

    Massachusetts regulators allege that Calugar's main liaison at Franklin, former sales executive William Post, checked with other fund companies for market-timing opportunities on Calugar's behalf. In April 2002, Post approached Los Angeles-based Capital Research & Management Co., which runs the giant American Funds family, to get forms to open an account, according to documents obtained by Massachusetts state investigators.

    Post outlined Calugar's investment strategy in vague terms and asked whether his "proposed trading activities" were acceptable. Massachusetts regulators and Capital Research declined to comment on whether Calugar ever struck a deal with American Funds or traded its fund shares.

    Post could not be reached for comment. Capital Research has not been accused of any wrongdoing.