Press Release: Settled Administrative Proceeding Against Zurich Capital Markets Inc. for Financing of Hedge Funds' Illegal Market Timing
Zurich Capital Markets Inc. was fined $16.8 million by the SEC for aiding and abetting four hedge funds in illegal mutual fund market timing by providing financing and creating anonymous SPVs to conceal their identities, resulting in harm to long-term shareholders and a finding of willful violations of Section 10(b) and Rule 10b-5.
The SEC ordered Zurich Capital Markets Inc. (ZCM) to pay $16.8 million—$12.8 million in disgorgement and prejudgment interest and a $4 million penalty—for aiding and abetting four hedge funds in illegal market timing of mutual funds. ZCM facilitated the fraud by providing derivative financing and establishing anonymous special purpose vehicles (SPVs) to disguise the hedge funds’ identities and evade detection, profiting from associated fees. The Commission found ZCM willfully aided violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act, and while ZCM consented to the settlement without admitting or denying guilt, its cooperation was considered a mitigating factor.
Zurich Capital Markets Inc. (ZCM), a New York-based subsidiary of Zurich Financial Services, was charged by the SEC with aiding and abetting four hedge funds in illegal market timing of mutual funds that explicitly prohibited such rapid trading. To evade detection, ZCM created anonymous special purpose vehicles (SPVs) through which multiple brokerage accounts were opened, allowing the hedge funds to disguise their identities and execute deceptive trades undetected. ZCM knowingly profited from fees generated by providing derivative financing to these hedge funds, directly benefiting from their fraudulent activity. The SEC determined that ZCM willfully aided and abetted violations of Section 10(b) of the Securities Exchange Act and Rule 10b-5, which prohibit deceptive practices in securities transactions. As a result, ZCM was ordered to pay $16.8 million—$12.8 million in disgorgement and prejudgment interest, plus a $4 million penalty—to be distributed to the mutual funds harmed by the market timing. ZCM, which was winding down its operations at the time, consented to the settlement without admitting or denying the findings, and the SEC acknowledged its cooperation during the investigation as a mitigating factor. This case underscored the SEC’s commitment to holding financial intermediaries accountable for enabling hedge fund fraud.
Exhibits & Attached Documents (1)
Extracted insights
- $16.80M $16.8 million $10M–$100M
- $12.80M $12.8 million $10M–$100M
- $4.00M $4 million $1M–$10M
- person helene glotzer
- person mark k. schonfeld
- agency Securities and Exchange Commission
- company settled administrative proceeding against zurich capital markets inc.
- company zurich capital markets inc.
- Zurich Capital Markets Inc. settled administrative proceeding for Financing of Hedge Funds' Illegal Market Timing
- SEC ordered Zurich Capital Markets Inc. to pay $16.8 million
- Zurich Capital Markets Inc. paid $12.8 million in disgorgement and prejudgment interest
- Zurich Capital Markets Inc. paid $4 million penalty
- Zurich Capital Markets Inc. provided financing to hedge fund clients engaged in market timing
- Zurich Capital Markets Inc. created anonymous special purpose vehicles (SPVs) for hedge fund clients
- Zurich Capital Markets Inc. aided and abetted four hedge funds carrying out schemes to defraud mutual funds
- Zurich Capital Markets Inc. violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
- Mark K. Schonfeld is Director of the New York Regional Office
- Helene Glotzer is Associate Director of the New York Regional Office
- SEC announced settled administrative proceeding against Zurich Capital Markets Inc.
- Zurich Capital Markets Inc. is New York-based subsidiary of Zurich Financial Services
Settled Administrative Proceeding Against Zurich Capital Markets Inc. for Financing of Hedge Funds' Illegal Market Timing FOR IMMEDIATE RELEASE 2007-88 Washington, D.C., May 7, 2007 - The Securities and Exchange Commission today announced a settled administrative proceeding against Zurich Capital Markets Inc. (ZCM) for its role in providing financing to hedge fund clients that engaged in market timing of mutual funds and facilitating the hedge funds' deceptive trading tactics. The Commission ordered ZCM, a New York-based subsidiary of Zurich Financial Services, to pay $16.8 million consisting of $12.8 million in disgorgement and prejudgment interest and a $4 million penalty. The money will be distributed to the mutual funds that were harmed as a result of market timing ZCM facilitated. Mark K. Schonfeld, Director of the New York Regional Office, said, "By knowingly financing their hedge funds clients' deceptive market timing, ZCM reaped substantial fees at the expense of long-term mutual fund shareholders. Because of ZCM's attractive financing arrangement and its willingness to create a number of anonymous special purpose vehicles (SPVs) for its hedge fund clients, the hedge funds were able to inflate their trading profits from their deceptive conduct." Helene Glotzer, Associate Director of the New York Regional Office, added, "This action demonstrates that the Commission continues to carefully examine the role of financial intermediaries that assist hedge funds engaged in deceptive practices." The Commission's Order finds that ZCM aided and abetted four hedge funds that were carrying out schemes to defraud mutual funds that prohibited market timing. ZCM's hedge fund clients knew that many of these mutual funds prohibited market timing. In an effort to avoid being detected and potentially blocked from making market-timing trades in these funds, each of these hedge funds and ZCM disguised their identities. For example, ZCM created seemingly unaffiliated SPVs in whose name multiple brokerage accounts were opened, thus enabling ZCM's hedge fund clients to disguise their identities and market time mutual funds. The Order finds that ZCM profited from the fees it received from the business of providing derivative financing to hedge funds engaging in a mutual fund market-timing strategy. As a result, the Commission's Order finds that ZCM willfully aided and abetted and caused violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. ZCM, which is currently winding down its operations, consented to the entry of the Commission's Order without admitting or denying the Commission's findings. In determining to accept the settlement, the Commission considered ZCM's cooperation in this investigation. # # # For more information, contact: Mark K. Schonfeld Regional Director 212-336-1020 Helene T. Glotzer Associate Regional Director 212-336-0078 Kay L. Lackey Assistant Regional Director 212-336-0117 SEC New York Regional Office Additional materials: Administrative Proceeding, (Release No. 34-55711) http://www.sec.gov/news/press/2007/2007-88.htm Home | Previous Page Modified: 05/07/2007
Settled Administrative Proceeding Against Zurich Capital Markets Inc. for Financing of Hedge Funds' Illegal Market Timing FOR IMMEDIATE RELEASE 2007-88 Washington, D.C., May 7, 2007 - The Securities and Exchange Commission today announced a settled administrative proceeding against Zurich Capital Markets Inc. (ZCM) for its role in providing financing to hedge fund clients that engaged in market timing of mutual funds and facilitating the hedge funds' deceptive trading tactics. The Commission ordered ZCM, a New York-based subsidiary of Zurich Financial Services, to pay $16.8 million consisting of $12.8 million in disgorgement and prejudgment interest and a $4 million penalty. The money will be distributed to the mutual funds that were harmed as a result of market timing ZCM facilitated. Mark K. Schonfeld, Director of the New York Regional Office, said, "By knowingly financing their hedge funds clients' deceptive market timing, ZCM reaped substantial fees at the expense of long-term mutual fund shareholders. Because of ZCM's attractive financing arrangement and its willingness to create a number of anonymous special purpose vehicles (SPVs) for its hedge fund clients, the hedge funds were able to inflate their trading profits from their deceptive conduct." Helene Glotzer, Associate Director of the New York Regional Office, added, "This action demonstrates that the Commission continues to carefully examine the role of financial intermediaries that assist hedge funds engaged in deceptive practices." The Commission's Order finds that ZCM aided and abetted four hedge funds that were carrying out schemes to defraud mutual funds that prohibited market timing. ZCM's hedge fund clients knew that many of these mutual funds prohibited market timing. In an effort to avoid being detected and potentially blocked from making market-timing trades in these funds, each of these hedge funds and ZCM disguised their identities. For example, ZCM created seemingly unaffiliated SPVs in whose name multiple brokerage accounts were opened, thus enabling ZCM's hedge fund clients to disguise their identities and market time mutual funds. The Order finds that ZCM profited from the fees it received from the business of providing derivative financing to hedge funds engaging in a mutual fund market-timing strategy. As a result, the Commission's Order finds that ZCM willfully aided and abetted and caused violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. ZCM, which is currently winding down its operations, consented to the entry of the Commission's Order without admitting or denying the Commission's findings. In determining to accept the settlement, the Commission considered ZCM's cooperation in this investigation. # # # For more information, contact: Mark K. Schonfeld Regional Director 212-336-1020 Helene T. Glotzer Associate Regional Director 212-336-0078 Kay L. Lackey Assistant Regional Director 212-336-0117 SEC New York Regional Office Additional materials: Administrative Proceeding, (Release No. 34-55711) http://www.sec.gov/news/press/2007/2007-88.htm Home | Previous Page Modified: 05/07/2007