Millennium Partners LP, a high-flying and secretive hedge fund founded by Wall Street strategist Israel A. Englander, agreed to pay $180 million to settle allegations brought by New York Attorney General Eliot L. Spitzer and the Securities and Exchange Commission that the firm engaged in a massive illegal trading scheme that bilked mutual funds out of tens of millions of dollars.
The parallel settlements, unveiled separately by the two agencies yesterday, are the capstone of the investigations that have roiled the $8.5 trillion mutual fund industry since Spitzer revealed the first improper-trading allegations against New Jersey-based Canary Capital Partners LLC, a much smaller hedge fund, two years ago. Millennium is the 15th financial firm to settle civil improper-trading charges in the probe, which has also led to criminal charges against mutual fund and other executives.
Among those is a former Millennium trader, Steven B. Markovitz, 43, who pleaded guilty to a felony fraud charge in October 2003 and is cooperating with investigators, according to a person familiar with the matter. A lawyer for Markovitz, who is awaiting sentencing, couldn't be reached.
Spitzer's 75-page complaint provides an intriguing peek into the operations of Millennium, one of the hedge-fund industry's most prominent players. Lightly regulated hedge funds seek supercharged returns through alternative -- and sometimes esoteric and risky -- investing strategies.
In the complaint, Spitzer alleges that Englander, along with three other Millennium executives, set up more than 100 shell companies and opened 1,000 trading accounts at 39 clearing firms in an elaborate scheme to fool mutual fund companies into allowing the rapid trading of their fund shares, a practice known as market timing. Most mutual funds have rules against short-term trading, which hurts long-term investors by ramping up transaction costs and skimming off profit to the timing firm.
The defendants neither admitted nor denied wrongdoing.
Spitzer's complaint cites e-mails, notes of telephone conversations and internal documents in which Millennium executives discuss the alleged scheme. In one e-mail, a trader tells Englander of a strategy to evade detection using a series of taxpayer identification numbers and brokers. "Using different tax ID's and different broker rep numbers should shield us to some extent from fund crackdowns," wrote Kovan K. Pillai, one of the defendants.
In internal Millennium documents, the practice of evading mutual fund detection was referred to as "flying under the radar." In another e-mail, which was forwarded to Terence W. Feeney, a Millennium vice chairman and its chief operating officer, and copied to Englander, a Millennium trader expresses "casual disregard" for mutual fund warnings against market timing, the Spitzer complaint says.
"I get scores of letters a week," the trader writes in response to a complaints about his tactics from a mutual fund. "I get kicked out of fistfuls of annuity companies by the week. . . . its just pointless to seize upon this letter to somehow judge the risk to the firm." The e-mails are undated. The alleged wrongdoing took place between about 1999 and 2003.
In a typical timing trade, a short-term buyer might watch the U.S. stock market rise strongly late in the day, then buy shares of a U.S. mutual fund that owns foreign stocks, on the assumption that foreign markets would also open strongly a few hours later. The funds would be sold the next day or within days.
A spokesman for the firm, as well as Englander, Pillai, Feeney and a fourth defendant, Fred M. Stone, Millennium's general counsel, said all were "pleased to have reached a comprehensive resolution" to the investigations, which they settled as a "business decision in order to put this matter behind us and allow us to concentrate on our investments."
Under the terms of the settlements, Millennium is required to pay $148 million in penalties, while Englander must pay $30 million, Feeney $2 million, Stone $25,000 and Pillai $150,000. Englander, Feeney and Stone are barred for three years from serving as an officer or director of an investment firm. The firm is also required to hire new chief legal and chief compliance officers and adopt other reforms.
Bruce Karpati, the SEC's assistant regional director in New York, said the case shows that the commission will pursue wrongdoing by hedge funds and force the return of ill-gotten profits. "This is the first really big case against a hedge fund," he said.
The case is certain to provoke more worries about the murky hedge-fund industry, which has ballooned to about $1.1 trillion and more than 8,000 firms. Much of the growth has come in the past five years, spurred by investors frustrated by paltry returns in conventional stocks and bonds.
With $5 billion under management, Millennium is a prominent player. Founded in 1989 by Englander, now 57, a hard-driving trader and well-regarded strategist, Millennium has returned more than 24 percent since Jan. 1 2004, according to its spokesman, compared with 13 percent by the Standard & Poor's 500-stock index.
In the complaint, Spitzer alleges that market timing was not merely the strategy of a few rogue traders but was employed as part of Millennium's overall strategy as directed by top management and guided by the firm's general counsel, Stone. At one point, as much as 25 percent of Millennium's capital was devoted to the firm's market-timing strategies, according to the complaint.