Ex Mutuals.com officers charged in conspiracy
Forbes.com, March 15, 2004

NEW YORK (Reuters) - Mutuals.com's former top officer and two other former executives at the Dallas-based investment adviser have been charged with scheming to cheat mutual fund shareholders, prosecutors said Monday.

The criminal complaint, unsealed in Manhattan federal court, accuses former Chief Executive Officer Richard Sapio, former President Eric McDonald, and former Compliance Officer Michele Leftwich with one count of conspiracy to commit securities fraud. The count carries a possible maximum prison term of five years and a $250,000 fine.

The three were arraigned in Manhattan federal court late Monday. Sapio, 40, of Dallas was released on a $400,000 personal recognizance bond. McDonald, 31, of DeSoto, Texas, was released on a $200,000 bond and Leftwich, 35, of Dallas, was released on a $100,000 bond.

The Securities and Exchange Commission filed a related civil suit against the three late last year. All three defendants have voluntarily resigned their positions and a new management team was put in place at the company.

"Messrs. Sapio and McDonald, and Ms. Leftwich, are vigorously defending themselves against the charges. They have fully cooperated with the U.S. Attorney's Office and the Securities and Exchange Commission with respect to these matters," Mutual.com said in a statement on its Web site. "They now look forward to having their day in court and being fully exonerated of all charges," the firm said.

The company said the complaint does not affect its operations and that the government previously conceded that mutual fund market timing is not "per se illegal"

According to the complaint, Mutuals.com's principal business was helping its client hedge funds and other sophisticated investors to make short-term "market-timing" investments in mutual funds. Market timing is a practice involving short-term trading.

The charges state that the strategy caused Mutuals.com to receive numerous warnings from mutual fund companies that its trading practices were "unwanted" and harmful to shareholders. The funds said they would not permit such trades.

In response, the defendants devised a number of deceptive practices to circumvent the restrictions, the complaint charged. Prosecutors said that in 2003 alone, Mutuals.com and its entities were able to execute over 3,000 trades in mutual funds that had specifically complained about the short-term trading practices.

These practices, according to the charges, included creating multiple account numbers for the same client; using affiliated broker dealers to execute trades, and concealing and misrepresenting the relationship between Mutuals.com and these affiliated brokers.