IRVINE, Calif. — Although A.G. Edwards & Sons Inc. agreed to pay $3.9 million to settle federal charges involving allegations of mutual fund market timing, it still faces a legal battle being waged by one of the brokers involved in the case.
“It’s a classic scapegoat situation,” said Dan Rabinovitz, an attorney at Michaels & Ward LLP of Boston, who is representing Charles Sacco, a former A.G. Edwards broker in that city who is seeking unspecified damages from his ex-employer.
Mr. Sacco agreed to pay $15,000 in restitution and interest to settle charges brought by the Securities and Exchange Commission. As part of that settlement, he is suspended from working within the industry for at least two years.
Neither Mr. Sacco nor the firm admitted to any wrongdoing in settling with the SEC.
Now, however, Mr. Sacco has an arbitration claim pending against St. Louis-based A.G. Edwards for defamation, Mr. Rabinovitz said.
U-5 defamation
“[A.G. Edwards] put down on his U-5 [termination form] that they let him go because of ‘business practices that were incompatible’” with the firm, Mr. Rabinovitz said.
But the firm’s settlement shows “that the company was always aware of every intimate detail [of the market-timing activity, and] embraced it,” Mr. Rabinovitz said.
Mr. Sacco was fired from A.G. Edwards in October 2003.
Ever since the market-timing scandal, which surfaced in 2003 when then-New York Attorney General Eliot L. Spitzer announced a probe into Secaucus, N.J.-based
hedge fund Canary Capital Partners LLC, the wording used to describe Mr. Sacco’s departure on his U-5 has become “industry code” for market timing, Mr. Rabinovitz said.
“It was the kiss of death,” Mr. Rabinovitz added.
Mr. Sacco’s manager, Jeffrey Robles, also was charged, along with broker Thomas Bridge of the Boca Raton, Fla., branch of A.G. Edwards, and Mr. Bridge’s manager, James Edge.
All three individuals are still with the firm and are contesting the SEC’s charges.
Their attorney, Christopher Litterio of Ruberto Israel Weiner PC in Boston, declined to comment.
A.G. Edwards spokeswoman Pia Reinhold also declined to discuss the brokers’ cases.
“We are pleased to put the [charges] against the firm behind us,” she said in a statement.
Mr. Sacco’s suit against A.G. Edwards may have a chance.
In a similar claim, three brokers with Merrill Lynch & Co. Inc. of New York were awarded more than $14 million by an arbitration panel last year. Merrill publicly claimed that the brokers had deceived the firm in their rapid trading of fund shares, and stated on their U-5s that they had violated firm policies.
The reps sued, saying that Merrill knew exactly what type of business they did when they were recruited as a team in 2002, a year and a half before they were fired.
Mr. Rabinovitz said brokers everywhere were in a tough spot before market timing became the scandal du jour. “It was not clear [prior to the Canary case] that market timing was illegal, which is why so many people were doing it,” he said.
A.G. Edwards has refined its mutual fund order procedures since the market-timing issue surfaced four years ago, Ms. Reinhold said in the statement.
The SEC alleged that the A.G. Edwards brokers helped unidentified
hedge fund clients trade through the firms’ mutual fund wrap program, despite numerous complaints from fund companies about the trading activity.
The commission said that the brokers created multiple rep numbers by splitting accounts, thereby helping to avoid detection.
Mr. Rabinovitz said that once the trading became an issue, A.G. Edwards claimed not to know that Mr. Sacco was using multiple accounts and multiple rep numbers.
“That’s absolutely false,” Mr. Rabinovitz said. “There is documentation that [the firm] knew the reasons for multiple account numbers. It was common knowledge.”
In 2005, Massachusetts securities regulators charged A.G. Edwards with fraud for allowing select investors to engage in market timing. In that case, the regulators said that A.G. Edwards made the hedge funds sign a letter indemnifying the brokerage firm against legal actions that might arise from the client’s frequent trading.
The case is still pending.
