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17 Nov 2006

Hedge Funds Sued by Attorney General

State Attorney General Eliot Spitzer sued Samaritan Asset Management Services Inc, their advisors, Johnson Capital Management Inc, and Edward Owens, a principal at the hedge fund.

The company allegedly engaged in a fraudulent mutual fund market-timing scheme. The defendants secretly “piggy-backed” their trades on the investment accounts of retirement plans. The suit claims that the market timing trades hurt long-term investors and the suit seeks restitution and an order to stop them from carrying out improper trades.

Last month Spitzer also sued the mutual fund manager J. & W. Seligman for the same practice, contending that it owes investors $80 million in compensation for improper market-timing trades. In July, Waddell & Reed Financial Inc., one of the nation’s oldest mutual fund management companies, agreed to pay $50 million to settle Spitzer’s investigation into improper trading.

That was the 19th settlement for Spitzer since he began the mutual fund investigation in 2003. Investors have received $3.4 billion in restitution under the settlements, Spitzer said.

Market timing involves rapid in-and-out trades that can disadvantage ordinary shareholders by diluting the value of their shares. It’s not illegal but it’s prohibited by many funds, as any standard that favors one investor at the expense of another tends to undermine the credibility of the industry.

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