Free Statement - District Court of Arizona - Arizona

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MOLLY M. WHITE, Cal. Bar No. 171448 E-mail: [email protected] JESSICA RIGLEY MARREN, Cal. Bar No. 208074 E-mail: [email protected] Attorneys for Plaintiff Securities and Exchange Commission Randall R. Lee, Regional Director Briane N. Mitchell, Associate Regional Director 5670 Wilshire Boulevard, 11th Floor Los Angeles, California 90036 Telephone: (323) 965-3998 Facsimile: (323) 965-3908 UNITED STATES DISTRICT COURT DISTRICT OF ARIZONA SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. GRANT D. SEEGER, et al., Defendants. Pursuant to the Court's Scheduling and Planning Order, the Securities and Exchange Commission ("Commission") provides the following preliminary statement of issues. On July 11, 2006, Commission counsel sent Mr. Seeger an email reminding him that the court ordered the parties to file a preliminary statement of issues on Friday, July 14, and asking Mr. Seeger to call counsel to discuss the preliminary statement of issues. Mr. Seeger did not call Commission counsel. The Commission, therefore, files this Preliminary Statement of Issues in lieu of a Preliminary Joint Statement of Issues. Case No. CV-03-2323-PHX-JWS PRELIMINARY STATEMENT OF ISSUES

Case Status Commission counsel and Defendants Nicole Mc Dermott and William Kenyon have reached a tentative settlement, which has not yet been approved by
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the Commission. Commission counsel is in the process of obtaining the Commission's approval, which process usually takes 30 to 60 days. Commission counsel continues to discuss potential settlement with the last remaining defendant, Grant D. Seeger, who is now representing himself pro se.

Statement of Stipulated Issues The Commission and Defendant Grant D. Seeger agree on the following issues (these facts were admitted in Defendant Seeger's Answer): 1. This Court has jurisdiction over this action pursuant to Sections 20(b),

20(d)(1) and 22(a) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §§ 77t(b), 77t(d)(1) & 77v(a), Sections 21(d)(1), 21(d)(3)(A), 21(e) and 27 of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§ 78u(d)(1), 78u(d)(3)(A), 78u(e) & 78aa, and Sections 42(d), 42(e)(1) and 44 of the Investment Company Act of 1940 ("Investment Company Act"), 15 U.S.C. §§ 80a41(d), 80a-41(e)(1) & 80a-43. Mr. Seeger, directly or indirectly, made use of the means or instrumentalities of interstate commerce, of the mails, or of the facilities of a national securities exchange in connection with the transactions, acts, practices and courses of business alleged in this Complaint. 2. Venue is proper in this district pursuant to Section 22(a) of the

Securities Act, 15 U.S.C. § 77v(a), Section 27 of the Exchange Act, 15 U.S.C. § 78aa, and Section 44 of the Investment Company Act, 15 U.S.C. § 80a-43, because certain of the transactions, acts, practices and courses of conduct constituting violations of the federal securities laws occurred within this district. 3. Security Trust Company had a compensation arrangement that

included a custodial fee and a profit sharing agreement. 4. Security Trust Company ("STC") based in Phoenix, Arizona, was an

uninsured national banking association that provided trust and custody-related services to high net-worth individuals, private trusts and entities, and retirement
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plans and their administrators. STC did not hold deposits, was not a public company and was not registered with the Commission in any capacity. As of August 31, 2003, STC reported that it had $12.9 billion in assets under administration. 5. 6. Grant D. Seeger resides in Phoenix, Arizona. Grant D. Seeger served as the Chief Executive Officer of STC from

1998 until his resignation on October 5, 2003. 7. In 1991, Seeger formed STC's predecessor, Security Investment

Management & Trust, to engage in securities sales to private custodial accounts. In 1998, Seeger shifted STC's business to serving as a custodian for retirement plans and their third party administrators, or TPAs. At that time, STC developed an electronic trading platform that allows retirement plan participants to trade multiple mutual funds in a single day. The platform relies on STC's access to an interface sponsored by the National Securities Clearing Corporation ("NSCC") that enabled simultaneous trading in thousands of mutual funds through an NSCC subsidiary corporation known as Defined Contribution Clearance & Settlement. STC's platform was designed primarily for processing trades made by TPAs. 8. STC's trade processing for TPAs involves several steps. First,

retirement plan sponsors collect orders for the purchase and sale of mutual fund shares from plan participants during the day and then shut off the participants' ability to enter trading orders at 4:00 p.m. EST, when the markets close. Next, by approximately 6:30 p.m. EST, STC provides its TPA clients with a file showing that day's net asset value or "NAV" for all mutual funds that can be traded through its platform. TPAs then create a trade file listing the trades for all plan participants and deliver this file electronically to STC by approximately 9:00 p.m. EST. STC processes these files through internal, proprietary databases and sends them electronically to NSCC in a single, consolidated file. NSCC then executes and settles the trades with the various mutual funds, and provides confirmations to STC
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that are forwarded to the TPAs. 9. Canary Capital Partners, LLC, Canary Partners Ltd., and Hartz

Trading, Inc. (hereinafter "the hedge funds") contacted Seeger. 10. In early discussions with STC, the hedge funds learned that they could

submit trades through STC as late as 9:00 p.m. EST and still receive that day's NAV for the mutual funds traded because of STC's trade processing procedures for TPAs. Seeger specifically confirmed this fact to the hedge funds. 11. 12. funds. 13. 14. accounts. In 2000, STC opened omnibus accounts for the hedge funds. STC's taxpayer identification number was used for the omnibus In May 2000, the hedge funds opened several accounts at STC. STC obtained an addendum to its Custody Agreement with the hedge

Statement of Issues that Remain to be Litigated The following issues remain to be litigated: 1. Defendant Grant D. Seeger ("Seeger"), STC's former Chief Executive

Officer ("CEO"), facilitated and participated in fraudulent late trading and market timing schemes by a group of related hedge funds (the "hedge funds"). From May 2000 to July 2003, Seeger facilitated hundreds of trades by the hedge funds in nearly 400 different mutual funds. Approximately 99% of these trades were transmitted to STC after the 4:00 p.m. EST market close; 82% of the trades were sent to STC between 6:00 p.m. and 9:00 p.m. EST. 2. The hedge funds' late trading was effected by Seeger through STC's

electronic trading platform, which was designed primarily for processing trades by third party administrators ("TPAs") for retirement plans. STC repeatedly misrepresented to mutual funds that the hedge funds were a retirement plan accounts, even though STC's employees and senior management, including
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Seeger, knew that the hedge funds were not a TPA or a retirement plan account. The mutual funds expected that retirement plans and their TPAs required several hours after the market closed to process trades submitted by thousands of plan participants before market close, but the hedge funds had no such business purpose for submitting their own trades as late as five hours after market close. 3. In addition to late trading, Seeger also assisted the hedge funds in

various strategies ­ some devised by Seeger ­ to conceal their market-timing activities from mutual funds, including misrepresenting that the hedge funds were retirement accounts, allowing the hedge funds to trade in accounts marked with STC's tax identification number, and "piggybacking" the hedge funds' timing trades on the trades of other STC clients without their knowledge. 4. Late trading allowed the hedge funds to trade mutual fund shares at

the established 4:00 p.m. EST market close price based upon events reported after close of the market or perceived market momentum caused by after-hours trading. Market timing allowed the hedge funds to engage in short-term trading that exploited inefficiencies in mutual fund pricing. As a result of the late trading and market timing activities facilitated by Seeger, the hedge funds realized a profit of approximately $85 million. STC had a compensation arrangement with the hedge funds that included a custodial fee as large as 1% (STC charged most of its TPA clients a custodial fee of just 0.10%) and a 4% profit sharing arrangement with respect to most of the hedge funds' trades. STC received more than $5.8 million in direct compensation from the hedge funds. Late trading and market timing harmed mutual fund shareholders who did not participate in the scheme between STC and the hedge funds. 5. Seeger established the relationship with the hedge funds, negotiated

higher fees for STC, and facilitated the late trading and market timing schemes by, among other things, directing STC employees to treat the hedge funds as a retirement plan and devising some of the strategies used by the hedge funds to
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conceal their market timing trades. 6. Canary Capital Partners, LLC, is a domestic hedge fund, and Canary

Capital Partners, Ltd., is an offshore hedge fund domiciled in Bermuda, managed by an investment adviser, Canary Investment Management, LLC, and its principal, Edward J. Stern. Hartz Trading, Inc. is an entity formed by Stern and affiliated with the various Canary funds. (The foregoing entities are collectively referred to herein as "the hedge funds.") 7. In April 2000, the hedge funds contacted Seeger with the hope that

STC would provide them with market timing capacity. During due diligence discussions, representatives of the hedge funds explained the hedge funds' business in detail to Seeger, including the fact that the hedge funds were hedge funds and were engaged in market-timing activities. McDermott, as a member of an internal STC committee that approved all new business and from discussions with Seeger, learned that the hedge funds were not a TPA. Therefore, STC and Seeger knew from the beginning that the hedge funds were a private investment vehicle and not a retirement plan or a TPA. 8. "Late trading" refers to the practice of placing orders to buy or sell

mutual fund shares after close of market at 4:00 p.m. EST, but at the mutual fund's NAV, or price, determined at the market close. Late trading enables the trader to profit from market events that occur after 4:00 p.m. EST but that are not reflected in that day's price. 9. In May 2000, the hedge funds opened several accounts at STC to test

their ability to trade through STC's platform. Seeger directed STC employees to treat the hedge funds just like a TPA for a retirement plan. As a result, on account applications to mutual funds, which required STC to describe the hedge funds, STC employees represented that the hedge funds were a defined contribution plan. STC further represented the hedge funds to be a defined contribution plan when coding trades that STC sent to the NSCC, which settled mutual fund trades made
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through STC. These material representations were false and misleading. STC employees involved in administering the hedge funds' accounts knew that the hedge funds were not a TPA and that their trades did not involve retirement or defined contribution plans. Employees understood the hedge funds to be a "family account," a "hedge fund," or a "private investment manager." 10. From May 31, 2000 to July 10, 2003, the hedge funds effected mutual

fund trades at STC in 397 mutual funds through 22 master accounts and 136 subaccounts. Approximately 99% of these trades were sent to STC after 4:00 p.m. EST, and 82% were sent between 6:00 p.m. EST and 9:00 p.m. EST. The hedge funds used the late-trading capability provided by STC by preparing proposed trade orders during the day, and then making adjustments to the orders at around 4:30 p.m. EST and again at 6:30 p.m. EST based on after-hours trading data. The hedge funds would occasionally wait to finalize and send their trade file to STC until the last minute (i.e., just before 9:00 p.m. EST) in case any additional potentially market-moving news came out. 11. In October 2000, an STC employee raised the issue of the hedge

funds' late trading through STC with Seeger and others and questioned whether the "SEC wouldn't have a problem with our trading practices." A short time later, STC obtained an addendum to its Custody Agreement with the hedge funds. The addendum, which was no more than an effort to shield STC, indicated that "all Instructions delivered to Security Trust Company on any Business Day shall have been received by [the hedge funds] from the Client-Shareholder by the close of trading (currently 4:00 p.m. EST)." However, this did not occur until October 2000 and did not apply to the hedge funds because, unlike a TPA collecting orders from retirement plan participants, the hedge funds themselves (and not a purported "client-shareholder") were the ultimate decision-maker on their trades. Seeger knew that the hedge funds were not a retirement plan or TPA and had no basis to believe that the addendum applied to the hedge funds or would eliminate late
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trading by the hedge funds. Seeger knew or was reckless in not knowing that the hedge funds made trading decisions well after market close. Seeger took no further action to prevent further late trading or to investigate whether the hedge funds continued to effect late trades through STC. 12. "Market Timing" refers to the practice of short term buying and

selling of mutual fund shares in order to exploit inefficiencies in mutual fund pricing. 13. STC's trading platform not only enabled the hedge funds to conduct

late trading but also facilitated their market timing activities. Mutual funds often attempt to deter, police, or forbid market timing, but during its three-year relationship with the hedge funds, STC employed various methods to attempt to conceal the hedge funds' market timing activity from the mutual fund families. Seeger devised several of the methods STC used to conceal the market timing activity. Each of the methods of concealment was materially false and misleading. 14. The first method, employed immediately when the hedge funds

became STC's client, required STC employees to open accounts for the hedge funds with numerous mutual funds to be traded through STC. The hedge funds then affected trades through these accounts to determine which mutual funds would not detect or actively police timing. This "shotgun" approach immediately distinguished the hedge funds from STC's other clients because it required STC employees to deal with numerous complaints from mutual fund companies about market timing activity. These complaints prompted STC and the hedge funds in October 2000 to enter into a "best practices" agreement. The agreement, among other things, contained several provisions designed to reduce the likelihood that the mutual funds would detect the hedge funds' trades. The hedge funds continued to trade through multiple accounts during their entire relationship with STC. 15. The second method, called the "omnibus" approach, was launched in

2000 and involved opening five omnibus accounts (i.e., an account that contains
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trading for multiple clients or a master account that contains multiple subaccounts) for the hedge funds at STC through which the hedge funds' trades were rotated in an attempt to evade detection by the mutual funds. 16. The third method, called the "taxpayer ID" approach, was also

launched in 2000 and involved opening mirror accounts for the five omnibus accounts using STC's taxpayer identification number. Devised by Seeger, this approach sought to impede efforts by mutual fund companies to detect market timers by their tax identification numbers. 17. The fourth method, called "piggybacking," was launched in 2001 and

was also devised by Seeger. It involved setting up a sub-account within the account of one of STC's TPA clients and attaching the hedge funds' mutual fund trades to the trades of this client without its knowledge. The hedge funds employed the piggybacking strategy in at least two STC client accounts. In addition, hedge funds formed by Samaritan Asset Management and unaffiliated with the hedge funds employed the piggybacking strategy in at least two other STC client accounts. The mutual funds that the hedge funds traded through piggybacking had previously ejected the hedge funds for market timing, and the hedge funds hoped they could continue to trade these funds under the name of another STC client. The hedge funds relied on STC to identify the accounts of other clients that had large holdings in international funds. In June 2002, McDermott notified Seeger of her desire to locate additional mutual funds in which the hedge funds could piggyback so as to ensure the continued viability of STC's arrangements with the hedge funds. 18. Seeger routinely instructed STC employees to stonewall mutual fund

inquiries concerning the hedge funds' timing activity by playing dumb, stalling, and concealing the hedge funds' identity from the mutual funds. 19. Despite methods employed by defendants to conceal the hedge funds'

market timing, STC employees continued to receive a stream of complaints by
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mutual funds. Some complaints made very clear to defendants that the mutual funds objected to the hedge funds' use of the defined contribution trading platform when in fact the hedge funds were not a defined contribution plan. 20. Despite the complaints from the mutual funds, STC continued to

submit the hedge funds' trades through STC's trading platform until the hedge funds ended their relationship with STC in July 2003. Over the course of their relationship, STC received over $5.8 million in direct compensation from the hedge funds, which was the direct result of a highly profitable fee arrangement that Seeger negotiated. 21. By facilitating the hedge funds' ability to conduct late trading and

market timing and thereby to garner substantial profits at the expense of other mutual fund shareholders, Seeger unlawfully abstracted moneys belonging to those mutual funds. Seeger converted these funds both for the hedge funds' use in the form of trading gains and for his own use in the form of a 4% profit-sharing fee for STC on the hedge funds' gains. 22. Seeger, by engaging in the conduct described above, directly or

indirectly, in the offer or sale of securities by the use of means or instruments of transportation or communication in interstate commerce or by use of the mails: a. with scienter, employed devices, schemes, or artifices to defraud; b. obtained money or property by means of untrue statements of a material fact or by omitting to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or c. engaged in transactions, practices, or courses of business which operated or would operate as a fraud or deceit upon the purchaser. By engaging in the conduct described above, Seeger violated, and unless restrained
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and enjoined will continue to violate, Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a). 23. Seeger, by engaging in the conduct described above, directly or

indirectly, in connection with the purchase or sale of a security, by the use of means or instrumentalities of interstate commerce, of the mails, or of the facilities of a national securities exchange, with scienter: a. b. employed devices, schemes, or artifices to defraud; made untrue statements of a material fact or omitted to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or c. engaged in acts, practices, or courses of business which operated or would operate as a fraud or deceit upon other persons. By engaging in the conduct described above, Seeger violated, and unless restrained and enjoined will continue to violate, Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5. 24. Defendant Seeger, by engaging in the conduct described above, stole,

unlawfully abstracted, unlawfully and willfully converted to his own use or to the use of another, or embezzled the moneys, funds, securities, credits, property, or assets of a registered investment company. By reason of the foregoing, Seeger violated, and unless restrained and enjoined will continue to violate Section 37 of the Investment Company Act, 15 U.S.C. § 80a-36. 25. The Court should issue a judgment, in a form consistent with Rule

65(d) of the Federal Rules of Civil Procedure, permanently enjoining Seeger and his officers, agents, servants, employees, and attorneys, and those persons in active concert or participation with them, who receive actual notice of the order by personal service or otherwise, and each of them, from violating Section 17(a) of
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the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, and Section 37 of the Investment Company Act. 26. The Court should order Seeger to disgorge all ill-gotten gains from his

illegal conduct, together with prejudgment interest thereon, an order Seeger to provide an accounting. 27. The Court should order Seeger to pay civil penalties, pursuant to

Section 20(d) of the Securities Act, Section 21(d)(3) of the Exchange Act, and Section 42(e) of the Investment Company Act.

DATED: July 14, 2006

/s/ Molly M. White MOLLY M. WHITE JESSICA RIGLEY MARREN Attorneys for Plaintiff Securities and Exchange Commission

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PROOF OF SERVICE I am over the age of 18 years and not a party to this action. My business address is: [X] U.S. SECURITIES AND EXCHANGE COMMISSION, 5670 Wilshire Boulevard, 11th Floor, Los Angeles, California 90036. Telephone: (323) 965-3998 Fax: (323) 965-3908 On July 14, 2006, I served the document entitled PRELIMINARY STATEMENT OF ISSUES upon the parties to this action addressed as stated on the attached service list: [X] OFFICE MAIL: By placing in sealed envelope(s), which I placed for collection and mailing today following ordinary business practices. I am readily familiar with this agency's practice for collection and processing of correspondence for mailing; such correspondence would be deposited with the U.S. Postal Service on the same day in the ordinary course of business. [ ] PERSONAL DEPOSIT IN MAIL: By placing in sealed envelope(s), which I personally deposited with the U.S. Postal Service. Each such envelope was deposited with the U.S. Postal Service at Los Angeles, California, with first class postage thereon fully prepaid. EXPRESS U.S. MAIL: Each such envelope was deposited in a facility regularly maintained at the U.S. Postal Service for receipt of Express Mail at Los Angeles, California, with Express Mail postage paid.

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PERSONAL SERVICE: I caused to be personally delivered each such envelope by hand to the office of the addressee. FEDERAL EXPRESS: By placing in sealed envelope(s) designated by Federal Express with delivery fees paid or provided for, which I deposited in a facility regularly maintained by Federal Express or delivered to a Federal Express courier, at Los Angeles, California. FAX (BY AGREEMENT ONLY): By transmitting the document by facsimile transmission. The transmission was reported as complete and without error. ELECTRONIC MAIL: By transmitting the document by electronic mail to the electronic mail address as stated on the attached service list. (Federal) I declare that I am employed in the office of a member of the bar of this Court, at whose direction the service was made. I declare under penalty of perjury that the foregoing is true and correct. /s/ Magnolia M. Marcelo MAGNOLIA M. MARCELO

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[X] [X]

Date: July 14, 2006

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SEC v. Security Trust Company, et al. United States District Court - District of Arizona Case No. CV 03-2323 PHX JWS (LA-2781) SERVICE LIST Grant D. Seeger, Pro Se 3906 North 54th Way Phoenix AZ 85016 Email: [email protected] J. Alex Grimsley, Esq. Jacob A. Maskovich, Esq. Bryan Cave LLP Two N. Central Avenue, Suite 2200 Phoenix, AZ 85004-4406 Email: [email protected] Email: [email protected] Attorney for Defendant William Kenyon William M. Brodsky, Esq. Fox Horan & Camerini LLP 825 Third Avenue, 11th Floor New York, NY 10022 Email: [email protected] Attorney for Defendant Nicole McDermott

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