SEC v. SECURITY TRUST COMPANY, N.A.; GRANT D. SEEGER; WILLIAM A. KENYON; and NICOLE MCDERMOTT, District of Arizona — Complaint

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Nicolas Morgan, Cal. Bar No. 166441
Michele Wein Layne, Cal. Bar No. 118395
Andrew Petillon, Cal. Bar No. 132652
Marshall Sprung, Cal. Bar No. 188253
Attorneys for Plaintiff
Securities and Exchange Commission
Randall R. Lee, Regional Director
Sandra J. Harris, Associate Regional Director
5670 Wilshire Boulevard, 11
th
 Floor
Los Angeles, California 90036-3648
Telephone:(323) 965-3998
Facsimile:(323) 965-3908
UNITED STATES DISTRICT COURT
DISTRICT OF ARIZONA
SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,
v.
SECURITY TRUST COMPANY,
N.A., GRANT D. SEEGER,
WILLIAM A. KENYON, and
NICOLE MCDERMOTT,
Defendants.
Case No. 
COMPLAINT FOR VIOLATIONS
OF THE FEDERAL SECURITIES
LAWS
Plaintiff Securities and Exchange Commission ("Commission")
alleges as follows:
JURISDICTION AND VENUE
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. §§ 80a-41(d),           
80a-41(e)(1) & 80a-43.  Defendants have, directly or indirectly, made use

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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.
SUMMARY
3.Defendants Security Trust Company, N.A. ("STC"), an
unregistered financial intermediary, Grant D. Seeger, STC's former Chief
Executive Officer ("CEO"), William A. Kenyon, STC's former president,
and Nicole McDermott, STC's former Senior Vice President for
Corporate Services, 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, defendants 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.
4.The hedge funds’ late trading was effected by defendants
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 account, even though STC’s
employees and senior management, including Seeger, Kenyon, and

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McDermott, 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.
5.In addition to late trading, defendants 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.
6.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 defendants, 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 .10%) and a 4% profit
sharing arrangement with respect to most of the hedge funds' trades.  STC
received over $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.
7.The Commission seeks to enjoin the individual defendants

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from future violations of the federal securities laws alleged herein, and
seeks from all defendants to obtain civil money penalties for defendants'
violations, obtain disgorgement of all benefits received by defendants,
and require defendants to provide an accounting of their compensation
related to STC's improper late trading and market timing conduct.
THE DEFENDANTS
8.Security Trust Company, N.A., based in Phoenix, Arizona, is
an uninsured national banking association that provides trust and
custody-related services to high net-worth individuals, private trusts and
entities, and retirement plans and their administrators.  STC does not hold
deposits, is not a public company and is 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.
9.Grant D. Seeger, 40, resides in Phoenix, Arizona.  He served
as STC's Chief Executive Officer from 1998 until his resignation on
October 5, 2003.  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 conceal their market timing trades.
10.William A. Kenyon, 57, resides in or near Phoenix, Arizona. 
He served as STC's President from 1998 until his termination in October
2003.  As STC's President, Kenyon oversaw all STC business units
involved in trading by the hedge funds, including trading, technology,
data management, and mutual fund services.  Kenyon supervised the key
operational departments and personnel involved in effecting the hedge
funds' trades and, despite receiving complaints from employees about the
frequency and impropriety of those trades, permitted employees to

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continue the improper activity.  Kenyon acted recklessly by failing to
heed numerous red flags presented to him by STC employees.
11.Nicole McDermott, 34, resides in or near Phoenix, Arizona. 
She was employed by STC from February 2000 until her termination in
October 2003.  At the time of her termination, she was STC's Senior Vice
President for Corporate Services.  As Senior Vice President, McDermott
supervised the employees who managed STC's client relationships and
STC's trading department, and she had daily meetings with Seeger and
occasional direct contact with the hedge funds.  McDermott, as STC's
most senior operational manager, both performed and directed several
STC employees to perform tasks that enabled the hedge funds to conduct
late trading and market timing through STC.
RELATED ENTITIES
12.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."
THE FRAUDULENT SCHEME
A.STC Develops a Trade Processing Platform for TPAs of
Retirement Plans
13.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

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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.
14.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 that are forwarded to the TPAs.
B.The STC-Hedge Fund Relationship
15.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

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the hedge funds were not a TPA.  Therefore, STC, Seeger, and
McDermott all knew from the beginning that the hedge funds were a
private investment vehicle and not a retirement plan or a TPA.
C.Late Trading
16."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.
17.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. 
18.In May 2000, the hedge funds opened several accounts at
STC to test their ability to trade through STC’s platform.  Seeger and
McDermott 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 through STC.  These material representations were false
and misleading.  McDermott, Kenyon, and 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."

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19.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 sub-accounts.  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.
20.In October 2000, an STC employee raised the issue of the
hedge funds' late trading through STC with Seeger, Kenyon and
McDermott 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,
Kenyon and McDermott 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 trading by the hedge funds. 
Defendants knew or were reckless in not knowing that the hedge funds

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made trading decisions well after market close.  Neither Seeger, Kenyon,
nor McDermott took any further action to prevent further late trading or
to investigate whether the hedge funds continued to effect late trades
through STC.
D.Market Timing
21."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.
22.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.  McDermott
was intimately familiar with those methods and helped to implement
some of them.
23.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 effected 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, which McDermott

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drafted.  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.
24.The second method, called the "omnibus" approach, was
launched in 2000 and involved opening five omnibus accounts (i.e., an
account that contains 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.
25.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.
26.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

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international funds.  McDermott directed employees to locate additional
accounts at STC that the hedge funds could piggyback, but she knew or
was reckless in not knowing that those account holders were not aware of
and had not approved the hedge funds' piggybacking.  In June 2002,
McDermott notified Seeger and Kenyon 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.  An
STC employee informed Kenyon about the piggybacking, and suggested
that Kenyon contact a securities lawyer.  Kenyon did not do so.
27.Seeger and McDermott 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.  McDermott, known at STC as "Seeger
Jr.," told STC employees to do all they could for the hedge funds because
the account was very important to STC.
28.Despite methods employed by defendants to conceal the
hedge funds’ market timing, STC employees continued to receive a
stream of complaints by 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.  STC employees expressed concerns
about these complaints to Kenyon, but he permitted the hedge funds'
timing activity to continue.  Kenyon did not direct STC employees to
investigate the hedge funds' trading activity.  Nor did Kenyon contact the
mutual funds traded by the hedge funds to inquire further about the basis
for the mutual funds' complaints.
29.Despite the complaints from the mutual funds, STC
continued to submit the hedge funds’ trades through STC’s trading

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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. 
Kenyon closely monitored STC employees to make sure that the hedge
funds immediately paid STC's invoices.
30.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.
FIRST CLAIM FOR RELIEF
FRAUD IN THE OFFER OR SALE OF SECURITIES
Violations of Section 17(a) of the Securities Act
(Against All Defendants)
31.The Commission realleges and incorporates by reference ¶¶
1 through 30 above.
32.Defendants, 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

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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.
33.By engaging in the conduct described above, defendants
violated, and unless restrained and enjoined will continue to violate,
Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a).
SECOND CLAIM FOR RELIEF 
FRAUD IN CONNECTION WITH THE
PURCHASE OR SALE OF SECURITIES
Violations and Aiding and Abetting Violations of
Section 10(b) of the Exchange Act and Rule 10b-5 thereunder
(Against All Defendants)
34.The Commission realleges and incorporates by reference ¶¶
1 through 30 above.
35.Defendants, 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.employed devices, schemes, or artifices to defraud; 
b.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.

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36.By engaging in the conduct described above, defendants
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.
37.Defendants Kenyon and McDermott, and each of them,
knowingly provided substantial assistance to defendant STC's violations
of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
38.By engaging in the conduct described above and pursuant to
Section 20(e) of the Exchange Act, 15 U.S.C. § 78t(e), defendants
Kenyon and McDermott aided and abetted defendant STC's violations
and unless restrained and enjoined will continue to aid and abet STC's
violations of Section 10(b) of the Exchange Act and Rule 10b-5
thereunder.
THIRD CLAIM FOR RELIEF
IMPROPER LATE TRADING
Violations of Rule 22c-1 Promulgated Under
Section 22(c) of the Investment Company Act
(Against Defendant STC)
39.The Commission realleges and incorporates by reference ¶¶
1 through 30 above.
40.STC is a person designated in a mutual fund's prospectus as
authorized to consummate transactions in the mutual fund's shares.
41.Defendant STC, by engaging in the conduct described above,
sold, redeemed, or repurchased the shares of a registered investment
company at prices not based upon the current net asset value of such
security computed after receipt of a tender of such security for redemption
or of an order to purchase or sell such security.
42.By engaging in the conduct described above, defendant STC

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violated Rule 22c-1, 17 C.F.R.  § 270.22c-1, promulgated under Section
22(c) of the Investment Company Act of 1940, 15 U.S.C. § 80a-22(c).
FOURTH CLAIM FOR RELIEF
LARCENY
Violations of Section 37 of the Investment Company Act
(Against Defendant Seeger)
43.The Commission realleges and incorporates by reference ¶¶
1 through 30 above.
44.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.
45.By reason of the foregoing, defendant Seeger violated, and
unless restrained and enjoined will continue to violate, Section 37 of the
Investment Company Act, 15 U.S.C. § 80a-36.
PRAYER FOR RELIEF
WHEREFORE, the Commission respectfully requests that the
Court:
I.
Issue findings of fact and conclusions of law that the defendants
committed the alleged violations.
II.
Issue a judgment, in a form consistent with Fed. R. Civ. P. 65(d),
permanently enjoining defendant Seeger and his officers, agents, servants,
employees and attorneys, and those persons in active concert or
participation with any of them, who receive actual notice of the order by
personal service or otherwise, and each of them, from violating Section
17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule

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10b-5 thereunder, and Section 37 of the Investment Company Act.
III.
Issue judgments, in a form consistent with Fed. R. Civ. P. 65(d),
permanently enjoining defendants Kenyon and McDermott and their
officers, agents, servants, employees and attorneys, and those persons in
active concert or participation with any of them, who receive actual notice
of the order by personal service or otherwise, and each of them, from
violating Section 17(a) of the Securities Act and Section 10(b) of the
Exchange Act and Rule 10b-5 thereunder.
IV.
Order defendants to disgorge all ill-gotten gains from their illegal
conduct, together with prejudgment interest thereon, and order defendants
to provide an accounting.
V.
Order all defendants to pay civil penalties under Section 20(d) of
the Securities Act, 15 U.S.C. § 77t(d) and Section 21(d)(3) of the
Exchange Act, 15 U.S.C. § 78u(d)(3), and also order defendants STC and
Seeger to pay civil penalties under Section 42(e) of the Investment
Company Act, 15 U.S.C. § 80a-41(e).
VI.
Retain jurisdiction of this action in accordance with the principles
of equity and the Federal Rules of Civil Procedure in order to implement
and carry out the terms of all orders and decrees that may be entered, or to
entertain any suitable application or motion for additional relief within
the jurisdiction of this Court.
///
///
///

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VII.
Grant such other and further relief as this Court may determine to
be just and necessary.
DATED:  November 24, 2003___________________________
Nicolas Morgan
Michele Wein Layne
Andrew Petillon
Marshall Sprung
Attorneys for Plaintiff
Securities and Exchange Commission

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Nicolas Morgan, Cal. Bar No. 166441
Michele Wein Layne, Cal. Bar No. 118395
Andrew Petillon, Cal. Bar No. 132652
Marshall Sprung, Cal. Bar No. 188253

Attorneys for Plaintiff
Securities and Exchange Commission
Randall R. Lee, Regional Director
Sandra J. Harris, Associate Regional Director
5670 Wilshire Boulevard, 11th Floor
Los Angeles, California 90036-3648
Telephone: (323) 965-3998
Facsimile: (323) 965-3908

UNITED STATES DISTRICT COURT

DISTRICT OF ARIZONA

SECURITIES AND EXCHANGE
COMMISSION,

Plaintiff,

v.

SECURITY TRUST COMPANY,
N.A., GRANT D. SEEGER,
WILLIAM A. KENYON, and
NICOLE MCDERMOTT,

Defendants.

Case No. 

COMPLAINT FOR VIOLATIONS
OF THE FEDERAL SECURITIES
LAWS

Plaintiff Securities and Exchange Commission ("Commission")

alleges as follows:

JURISDICTION AND VENUE

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. §§ 80a-41(d),           

80a-41(e)(1) & 80a-43.  Defendants have, directly or indirectly, made use



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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.

SUMMARY

3. Defendants Security Trust Company, N.A. ("STC"), an

unregistered financial intermediary, Grant D. Seeger, STC's former Chief

Executive Officer ("CEO"), William A. Kenyon, STC's former president,

and Nicole McDermott, STC's former Senior Vice President for

Corporate Services, 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, defendants 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.

4. The hedge funds’ late trading was effected by defendants

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 account, even though STC’s

employees and senior management, including Seeger, Kenyon, and



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McDermott, 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.

5. In addition to late trading, defendants 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.

6. 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 defendants, 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 .10%) and a 4% profit

sharing arrangement with respect to most of the hedge funds' trades.  STC

received over $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.

7. The Commission seeks to enjoin the individual defendants



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from future violations of the federal securities laws alleged herein, and

seeks from all defendants to obtain civil money penalties for defendants'

violations, obtain disgorgement of all benefits received by defendants,

and require defendants to provide an accounting of their compensation

related to STC's improper late trading and market timing conduct.

THE DEFENDANTS

8. Security Trust Company, N.A., based in Phoenix, Arizona, is

an uninsured national banking association that provides trust and

custody-related services to high net-worth individuals, private trusts and

entities, and retirement plans and their administrators.  STC does not hold

deposits, is not a public company and is 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.

9. Grant D. Seeger, 40, resides in Phoenix, Arizona.  He served

as STC's Chief Executive Officer from 1998 until his resignation on

October 5, 2003.  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 conceal their market timing trades.

10. William A. Kenyon, 57, resides in or near Phoenix, Arizona. 

He served as STC's President from 1998 until his termination in October

2003.  As STC's President, Kenyon oversaw all STC business units

involved in trading by the hedge funds, including trading, technology,

data management, and mutual fund services.  Kenyon supervised the key

operational departments and personnel involved in effecting the hedge

funds' trades and, despite receiving complaints from employees about the

frequency and impropriety of those trades, permitted employees to



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continue the improper activity.  Kenyon acted recklessly by failing to

heed numerous red flags presented to him by STC employees.

11. Nicole McDermott, 34, resides in or near Phoenix, Arizona. 

She was employed by STC from February 2000 until her termination in

October 2003.  At the time of her termination, she was STC's Senior Vice

President for Corporate Services.  As Senior Vice President, McDermott

supervised the employees who managed STC's client relationships and

STC's trading department, and she had daily meetings with Seeger and

occasional direct contact with the hedge funds.  McDermott, as STC's

most senior operational manager, both performed and directed several

STC employees to perform tasks that enabled the hedge funds to conduct

late trading and market timing through STC.

RELATED ENTITIES

12. 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."

THE FRAUDULENT SCHEME

A. STC Develops a Trade Processing Platform for TPAs of

Retirement Plans

13. 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



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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.

14. 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 that are forwarded to the TPAs.

B. The STC-Hedge Fund Relationship

15. 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



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the hedge funds were not a TPA.  Therefore, STC, Seeger, and

McDermott all knew from the beginning that the hedge funds were a

private investment vehicle and not a retirement plan or a TPA.

C. Late Trading

16. "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.

17. 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. 

18. In May 2000, the hedge funds opened several accounts at

STC to test their ability to trade through STC’s platform.  Seeger and

McDermott 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 through STC.  These material representations were false

and misleading.  McDermott, Kenyon, and 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."



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19. 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 sub-accounts.  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.

20. In October 2000, an STC employee raised the issue of the

hedge funds' late trading through STC with Seeger, Kenyon and

McDermott 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,

Kenyon and McDermott 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 trading by the hedge funds. 

Defendants knew or were reckless in not knowing that the hedge funds



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made trading decisions well after market close.  Neither Seeger, Kenyon,

nor McDermott took any further action to prevent further late trading or

to investigate whether the hedge funds continued to effect late trades

through STC.

D. Market Timing

21. "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.

22. 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.  McDermott

was intimately familiar with those methods and helped to implement

some of them.

23. 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 effected 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, which McDermott



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drafted.  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.

24. The second method, called the "omnibus" approach, was

launched in 2000 and involved opening five omnibus accounts (i.e., an

account that contains 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.

25. 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.

26. 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



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international funds.  McDermott directed employees to locate additional

accounts at STC that the hedge funds could piggyback, but she knew or

was reckless in not knowing that those account holders were not aware of

and had not approved the hedge funds' piggybacking.  In June 2002,

McDermott notified Seeger and Kenyon 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.  An

STC employee informed Kenyon about the piggybacking, and suggested

that Kenyon contact a securities lawyer.  Kenyon did not do so.

27. Seeger and McDermott 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.  McDermott, known at STC as "Seeger

Jr.," told STC employees to do all they could for the hedge funds because

the account was very important to STC.

28. Despite methods employed by defendants to conceal the

hedge funds’ market timing, STC employees continued to receive a

stream of complaints by 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.  STC employees expressed concerns

about these complaints to Kenyon, but he permitted the hedge funds'

timing activity to continue.  Kenyon did not direct STC employees to

investigate the hedge funds' trading activity.  Nor did Kenyon contact the

mutual funds traded by the hedge funds to inquire further about the basis

for the mutual funds' complaints.

29. Despite the complaints from the mutual funds, STC

continued to submit the hedge funds’ trades through STC’s trading



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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. 

Kenyon closely monitored STC employees to make sure that the hedge

funds immediately paid STC's invoices.

30. 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.

FIRST CLAIM FOR RELIEF

FRAUD IN THE OFFER OR SALE OF SECURITIES

Violations of Section 17(a) of the Securities Act

(Against All Defendants)

31. The Commission realleges and incorporates by reference ¶¶

1 through 30 above.

32. Defendants, 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



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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.

33. By engaging in the conduct described above, defendants

violated, and unless restrained and enjoined will continue to violate,

Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a).

SECOND CLAIM FOR RELIEF 

FRAUD IN CONNECTION WITH THE

PURCHASE OR SALE OF SECURITIES

Violations and Aiding and Abetting Violations of

Section 10(b) of the Exchange Act and Rule 10b-5 thereunder

(Against All Defendants)

34. The Commission realleges and incorporates by reference ¶¶

1 through 30 above.

35. Defendants, 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. employed devices, schemes, or artifices to defraud; 

b. 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.



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36. By engaging in the conduct described above, defendants

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.

37. Defendants Kenyon and McDermott, and each of them,

knowingly provided substantial assistance to defendant STC's violations

of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

38. By engaging in the conduct described above and pursuant to

Section 20(e) of the Exchange Act, 15 U.S.C. § 78t(e), defendants

Kenyon and McDermott aided and abetted defendant STC's violations

and unless restrained and enjoined will continue to aid and abet STC's

violations of Section 10(b) of the Exchange Act and Rule 10b-5

thereunder.

THIRD CLAIM FOR RELIEF

IMPROPER LATE TRADING

Violations of Rule 22c-1 Promulgated Under

Section 22(c) of the Investment Company Act

(Against Defendant STC)

39. The Commission realleges and incorporates by reference ¶¶

1 through 30 above.

40. STC is a person designated in a mutual fund's prospectus as

authorized to consummate transactions in the mutual fund's shares.

41. Defendant STC, by engaging in the conduct described above,

sold, redeemed, or repurchased the shares of a registered investment

company at prices not based upon the current net asset value of such

security computed after receipt of a tender of such security for redemption

or of an order to purchase or sell such security.

42. By engaging in the conduct described above, defendant STC



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violated Rule 22c-1, 17 C.F.R.  § 270.22c-1, promulgated under Section

22(c) of the Investment Company Act of 1940, 15 U.S.C. § 80a-22(c).

FOURTH CLAIM FOR RELIEF

LARCENY

Violations of Section 37 of the Investment Company Act

(Against Defendant Seeger)

43. The Commission realleges and incorporates by reference ¶¶

1 through 30 above.

44. 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.

45. By reason of the foregoing, defendant Seeger violated, and

unless restrained and enjoined will continue to violate, Section 37 of the

Investment Company Act, 15 U.S.C. § 80a-36.

PRAYER FOR RELIEF

WHEREFORE, the Commission respectfully requests that the

Court:

I.

Issue findings of fact and conclusions of law that the defendants

committed the alleged violations.

II.

Issue a judgment, in a form consistent with Fed. R. Civ. P. 65(d),

permanently enjoining defendant Seeger and his officers, agents, servants,

employees and attorneys, and those persons in active concert or

participation with any of them, who receive actual notice of the order by

personal service or otherwise, and each of them, from violating Section

17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule



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10b-5 thereunder, and Section 37 of the Investment Company Act.

III.

Issue judgments, in a form consistent with Fed. R. Civ. P. 65(d),

permanently enjoining defendants Kenyon and McDermott and their

officers, agents, servants, employees and attorneys, and those persons in

active concert or participation with any of them, who receive actual notice

of the order by personal service or otherwise, and each of them, from

violating Section 17(a) of the Securities Act and Section 10(b) of the

Exchange Act and Rule 10b-5 thereunder.

IV.

Order defendants to disgorge all ill-gotten gains from their illegal

conduct, together with prejudgment interest thereon, and order defendants

to provide an accounting.

V.

Order all defendants to pay civil penalties under Section 20(d) of

the Securities Act, 15 U.S.C. § 77t(d) and Section 21(d)(3) of the

Exchange Act, 15 U.S.C. § 78u(d)(3), and also order defendants STC and

Seeger to pay civil penalties under Section 42(e) of the Investment

Company Act, 15 U.S.C. § 80a-41(e).

VI.

Retain jurisdiction of this action in accordance with the principles

of equity and the Federal Rules of Civil Procedure in order to implement

and carry out the terms of all orders and decrees that may be entered, or to

entertain any suitable application or motion for additional relief within

the jurisdiction of this Court.

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VII.

Grant such other and further relief as this Court may determine to

be just and necessary.

DATED:  November 24, 2003 ___________________________
Nicolas Morgan
Michele Wein Layne
Andrew Petillon
Marshall Sprung
Attorneys for Plaintiff
Securities and Exchange Commission