On August 2, 2006, ALJ Robert Mahony dismissed aiding and abetting charges against Paul Flynn, a former executive at CIBC, for allegedly assisting Security Trust, Samaritan Asset Management, and Canary Capital Partners in a scheme of late trading and market timing from 2001 to 2003. http://sec.gov/litigation/aljdec/2006/id316rgm.pdf Although finding that the market timing “strategies discussed above constituted a scheme and involved deceptive practices by STC and the Hedge Funds” and that Security Trust engaged in late trading, ALJ Mahony finally vindicated Mr. Flynn, holding that the record failed to show that Mr. Flynn participated in or was even “generally aware of playing any role” in the market timing or late trading. This ruling culminates a more than two year ordeal for Mr. Flynn.
That ordeal began in 2004 when N.Y. Attorney General Eliot Spitzer brought five felony charges against Mr. Flynn during his sweep of the mutual fund industry. Unlike others, Mr. Flynn refused to cut a deal. Spitzer’s office dropped the charges just before trial. Unfortunately, Mr. Flynn was also caught in the cross-hairs of the SEC, as the agency scrambled to keep pace with Spitzer’s mutual fund and headline grabbing task force. Compounding his legal troubles, the SEC brought an administrative proceeding against Mr. Flynn. Yet, market timing without additional facts is not illegal per se and the government’s late trading theory relies on an ambiguous phrase in Rule 22c-1 “NAV that it next computed.”
The basis for the government enforcement actions is recorded in the record of the SEC’s proceeding: While conducting due diligence for CIBC, Mr. Flynn visited Security Trust and learned information about how certain hedge funds intended to use a trading platform to market time and trade after hours. Mr. Flynn memorialized his findings in a memorandum that he later provided to the government. Because of overzealous investigators and a desire for large headlines, Mr. Flynn, who is no longer employed at CIBC, has spent the last two years fighting the government and trying to clear his name both of criminal and civil charges. One can only hope that the SEC staff will not appeal and will let Mr. Flynn’s ordeal end.