NEW YORK (CNN/Money) -
A former senior executive at Fred Alger Management Inc. on Thursday pled guilty, agreed to pay a fine and was barred for life from the securities industry on charges stemming from New York State Attorney General Elliot Spitzer and the Security and Exchange Commission's investigation into illegal mutual fund trading.
James Connelly Jr., who until days ago was vice chairman of Alger's brokerage unit and head of mutual fund sales and marketing, pled guilty to a charge of tampering with physical evidence related to the investigation, a crime punishable by up to four years in prison.
The SEC charged Connelly with allowing inappropriate "timing" of mutual fund sales for select investors in Alger funds. In a settlement with the commission, Connelly agreed to pay a civil fine of $400,000 and neither admitted nor denied the allegations. The SEC said he had been involved with market timing activities from the mid-1990s until this year.
"By early 2003, Connelly was requiring that investors seeking timing capacity agree to maintain at least 20 percent of their investment at Alger in buy-and-hold positions, sometimes referred to as "sticky assets," the SEC statement said.
According to the criminal complaint by Spitzer's office, Connelly repeatedly tried to "thwart the investigation." He tried to deceive Alger's own lawyers in order to prevent them from producing documents subpoenaed by Spitzer's office. Beginning Sept. 3, the day Spitzer's probe first became public, Connelly tried to hide trading arrangements between Alger and Veras Investment Partners, a Texas-based hedge fund.
Connelly directed Alger staff members to delete e-mails that had been subpoenaed by Spitzer's office and he later coached them to lie about facts related to the investigation and his own involvement with the trades, according to a press release issued by Spitzer's office and the SEC.
Alger is one of several mutual fund companies that Spitzer is investigating for allowing hedge funds to trade their shares at the 4 p.m. closing price, after 4 p.m. The practice, known as "late trading," is illegal, while market timing is not, but it can result in losses for average mutual fund investors. Hedge funds named in the investigation so far include Canary Partners and Millennium Partners.
Connelly, who was suspended by Alger on Oct. 3 along with two other employees, was until then the public face of the firm, which has worked hard to rebuild itself following the Sept. 11, 2001, terrorist attacks that decimated the company's staff and led some investors to pull money out of its funds.
In the Oct. 3 memo to investors that announced Connelly's suspension, Alger said a former client may have traded shares of the Alger Fund after 4 p.m. "for a limited period of time" in 2003.
Connelly was booked by authorities Thursday morning at the New York State Supreme Court in Manhattan and appeared before Judge James Yates in the afternoon. He is expected to be sentenced Dec. 17.
Fred Alger Management did not return a phone call for comment. Alger has cooperated with the investigation.
In early September Spitzer charged that four of the nation's largest mutual funds -- Bank One (ONE: down $0.03 to $41.57, Research, Estimates), Janus (JNS: down $0.29 to $14.45, Research, Estimates), Strong Financial and Bank of America (BAC: down $0.13 to $81.93, Research, Estimates)'s Nations Funds -- illegally gave Canary special privileges to make illegal trades, in return for fees. Canary agreed to pay $40 million to settle Spitzer's allegations that it engaged in trading after markets closed.
Spitzer's probe has spread and his office has sent subpoenas to other hedge funds and mutual fund companies, including Fidelity, Alliance Capital Management, Gabelli and Franklin Resources, as well as brokerages, including Bear Stearns, Morgan Stanley and Merrill Lynch, which fired three brokers linked to the scandal.
Two weeks ago, Steven Markovitz, a trader for Millennium Partners, pleaded guilty to a felony charge related to late trading of mutual fund shares and said several brokers helped him make his trades.