Broker charged in mutual-fund trading probe

Several dozen mutual fund companies and a smaller number of hedge funds have been subpoenaed. Spitzer said new information has been "pouring in at a surprising rate," but declined to elaborate.

"This is a wide-ranging and continuing investigation likely to result in numerous other charges," Spitzer said. "There is an effort by my office and the SEC to pursue what we believe to be a serious market problem."

Sihpol, who worked with Bank of America's high-net worth group in New York, was "at the center of the relationship between Canary and Bank of America," Spitzer said, helping the hedge fund make hundreds of late trades between April 2001 and July of this year. In exchange, Canary paid fees to the firm and agreed to make large, long-term investments in certain Bank of America funds, the complaint said.

Initially, authorities said, Canary traders would call or fax a list of trades to Sihpol and his team before the markets closed at 4 p.m. ET, and Sihpol's staff would fill out an order ticket, time stamp it and set it to one side. A Canary trader would phone Sihpol or one of his subordinates later, sometimes as late as 6:30 p.m. ET, and either confirm or cancel the "proposed" trades; if the order was canceled, the ticket would be discarded, the complaint said.

In the summer of 2001, Bank of America technicians installed a system in Canary's offices that would allow the hedge fund's traders to enter orders directly until 6:30 p.m. ET. Sihpol or a member of his team would reconcile Canary's trades the following day, the complaint said. A second direct access system was installed in the home of a Canary trader, it said.

Sihpol's actions "allowed a favored hedge fund customer to benefit at the expense of thousands of other investors," said Stephen Cutler, enforcement director for the SEC. Allowing shares to be traded at the 4 p.m. price after the market closed violated "one of the basic rules designed to assure all purchasers and sellers are treated the same," he said.

By making the joint announcement, Cutler and Spitzer sought to allay speculation that state investigators had trumped federal authorities by taking the lead in the investigation. Cutler praised the attorney general for acting on the information that led to the investigation, and emphasized that their goals were the same.

"Our combined message is clear: Late-trading is wrong," Cutler said.

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Contributing: Samuel Maull