Spitzer's Charges Face a Challenge

A Former Broker Is the First Person Named In Attorney General's Fund Probe to Go to Trial

NEW YORK -- Theodore C. Sihpol III is fighting back.

For more than three years now, New York Attorney General Eliot L. Spitzer has been reshaping the financial services industry, forcing out players he considers bad apples and extracting billions of dollars in fines from mutual fund companies, stock analysts and others in the industry.

Industry insiders and defense lawyers complain he is overstepping his role and violating constitutional principles of due process. But almost no one he has gone after has challenged his office in front of a jury. Until now.

Former Bank of America Corp. securities broker Sihpol is expected to take on Spitzer when he goes to trial today on 40 criminal charges for his role in helping a hedge fund place after-hours trades that Spitzer says are illegal. Sihpol is not the only one of Spitzer's targets fighting back. Former New York Stock Exchange chief Dick Grasso is challenging Spitzer's effort to make him return his $139.5 million in retirement compensation. But Sihpol's case is the first to go before a jury, and, unlike Grasso, he is facing criminal charges.

When Spitzer revealed the trades in question in September 2003, he sparked a wide-ranging shake-up of the $8.1 trillion fund industry that is still going on. More than a dozen brokerage firms and fund companies have given up more than $3 billion in fines, restitution and promised fee reductions to end Spitzer's investigations.

But Sihpol -- the first person to be criminally charged in the fund probe -- and his high-powered lawyer, C. Evan Stewart, aren't lying down and begging for a deal. Stewart contends that the trades were not even illegal and that Sihpol did not have criminal intent to commit larceny, fraud and alteration of business records.

"There's no marker out there, no prior enforcement action, no criminal case. How can someone have an intent to commit a crime?" Stewart said in a recent interview. "You don't put people in jail for things that were never deemed to be a crime before. That's a very dangerous way to have society run."

The debate centers on whether Sihpol, 37, should have known his fabulously wealthy client at Canary Capital Partners LLC, Edward J. Stern, was breaking the law by putting in same-day orders after 4 p.m. Spitzer has likened the trades to betting on a horse race after it was over, because the arrangement allowed Stern to profit from news announced after the markets closed, and Stern has paid $40 million to settle his part of the investigation. He did not admit wrongdoing.

But Stewart and the defense team say things are not that clear. The Securities and Exchange Commission regulation in place at the time of the trade does not use the words 4 p.m. Rather it simply states that all mutual fund orders placed after a fund has computed its daily price must get the next day's price. In practice, many funds do not calculate their daily price -- called a net asset value -- until nearly 5:30 p.m., although that calculation is based on the value of the funds' component stocks, and those prices are set at the 4 p.m. market close.

"There's no statute that says 4 o'clock. There's no manual that says 4 o'clock. This would be a very different case if there was," Stewart said.

A SEC survey done shortly after the scandal broke found that a quarter of brokerage firms had helped clients trade after 4 p.m. "Either a third of the industry are a bunch of criminals or there's a fair amount of confusion," said Stewart, whose bills are being paid by Bank of America because Stewart sued to enforce Sihpol's employment agreement, which required the company to provide him with legal counsel for charges related to his employment.

SEC spokesman John Nester declined to comment on the Sihpol case in particular, but he noted that new SEC rules proposed in the wake of the trading abuses state in their background section that trades must be placed before 4 p.m.