SEC Levies $153-Million Penalty on Fund Trader

Investor Daniel G. Calugar, who allegedly reaped a fortune through illegal mutual fund trades, agreed Tuesday to a $153-million settlement with the Securities and Exchange Commission.

The 51-year-old Calugar was accused of trading mutual fund shares after the markets had closed to take advantage of pricing trends, using phony time stamps to cover his tracks.

Regulators say he agreed to give up $103 million in ill-gotten gains and pay a $50-million fine -- the biggest hit to any individual in the nearly 2 1/2-year-old trading scandal. In addition, Calugar agreed in October to pay $72 million to settle a federal class-action lawsuit filed by mutual fund investors.

“The stupendous amount of Calugar’s illegal profits, combined with the egregiousness of his conduct, fully supports our record penalty against him,” said Randall R. Lee, director of the SEC’s Los Angeles office, which handled the case.

Calugar neither admitted nor denied wrongdoing. He could not be reached for comment, and his attorney did not return calls.

Now a resident of Ponte Vedra Beach, Fla., Calugar owned homes in Los Angeles and Las Vegas when the SEC’s case was filed in December 2003. At that time, the agency estimated his fortune at $550 million. That means he could be worth hundreds of millions of dollars even after he pays $225 million to regulators and investors.

Lee said Calugar’s other riches apparently were unconnected to the mutual fund case, although he said that the SEC did not know where the trader’s fortune originated.

Calugar had been a tax law specialist with an Atlanta firm before moving to Las Vegas in 1996, where he set up a company called Security Brokerage Inc. in a strip mall. The brokerage firm was formed as a vehicle for his own trades, the SEC said, and he had no outside clients.

From 2001 through 2003, Calugar allegedly pocketed $175 million through late trading and “market timing” schemes -- more than anyone else charged in the trading scandals that have scarred the $8.6-trillion fund industry since September 2003, according to the SEC.

Late trading is illegal and involves buying and selling mutual fund shares after the stock market has closed but still paying or receiving that day’s prices. Most funds price once daily, at 4 p.m. Eastern time, and orders received after the close are supposed to be processed at the next day’s share prices. Late traders exploit that system by purchasing shares of a foreign stock fund, for example, at a stale price after seeing an overseas run-up, then selling them the next day at a higher price.

The SEC alleged that Calugar routinely transmitted trades for his own account through Security Brokerage as late as 6 p.m. “without any legitimate reason,” using time stamps reading 3:59 p.m. to disguise the activity.

“He got the benefit of today’s price with tomorrow’s information,” said Michele Wein Layne, associate director of the SEC’s Los Angeles office.

Calugar allegedly engaged in late trading in mutual funds run by Alliance Capital and Massachusetts Financial Services, and also was accused of having been involved in market timing these funds.

Market timing, which involves rapid trading in and out of funds to take advantage of slight pricing discrepancies, is not necessarily illegal. The SEC’s complaint alleged that Calugar “timed” Alliance and MFS funds, knowing that their prospectuses prohibited or discouraged the practice.

Regulators say both market timing and late trading harm other investors in part by driving up mutual funds’ operating expenses, which are paid for by all shareholders. Both Alliance and MFS have resolved trading cases with state and federal regulators, who have reached settlements with these and other companies totaling more than $3 billion since the scandal broke.

The mutual fund business came under scrutiny in September 2003, when New York Atty. Gen. Eliot Spitzer brought the industry’s first market timing and late trading cases against hedge fund Canary Capital Partners.

In the wake of that case, Layne said, the SEC sifted through its regular exam records looking for securities firms that could be using similar tactics. Calugar drew scrutiny because of his unusually active fund trading pattern, she said.

A week before the SEC filed its case against Calugar, the agency obtained an emergency court order from U.S. District Judge Robert C. Jones in Nevada to freeze the trader’s assets after learning that he had allegedly tried to transfer $50 million out of his account at MFS.

Under terms of the settlement, which is subject to Jones’ approval, Calugar would be barred permanently from the brokerage industry.

Legal analysts said the financial settlement would send a strong message.

“The number of zeros involved -- and the fact that this settlement involves a trader who instigated the activity instead of a mutual fund complex -- will be a helpful deterrent,” said Henry Hu, a corporate and securities law professor at the University of Texas at Austin.

The SEC expects the $153 million to be distributed to mutual fund shareholders in coordination with the class-action settlement, Layne said. That process is being managed through U.S. District Court in Baltimore, where investor suits against Calugar and now-defunct Security Brokerage were consolidated.

Among other major individual settlements, Gary Pilgrim and Harold Baxter of fund manager Pilgrim Baxter & Associates paid $80 million each in fines and restitution. Richard Strong, founder of Strong Capital Management, paid $60 million.