U.S. Securities and Exchange Commission
Litigation Release No. 19526 / January 10, 2006
SEC v. Daniel Calugar and Security Brokerage, Inc., Case No. CV-S-03-1600-RCJ-RJJ (D. Nev.)
DANIEL CALUGAR AND SECURITY BROKERAGE, INC. TO PAY OVER $150 MILLION TO SETTLE SEC FRAUD ACTION FOR LATE TRADING AND MARKET TIMING
The Commission today announced that Daniel Calugar and his former registered broker-dealer, Security Brokerage, Inc. (SBI), agreed to settle the Commission’s charges alleging that they defrauded mutual fund investors through improper late trading and market timing. As part of the settlement, Calugar will disgorge $103 million in ill-gotten gains and pay a civil penalty of $50 million.
Calugar, age 51, of Ponte Vedra Beach, Florida, and SBI, formerly based in Las Vegas, have consented to the entry of a final judgment in the Commission’s civil litigation pending against them in the United States District Court for the District of Nevada. The final judgment, which is subject to approval by the Honorable Robert C. Jones, permanently enjoins Calugar and SBI from future violations of the antifraud provisions of the federal securities laws and orders Calugar to pay a total of $153 million in disgorgement and penalties. Calugar also consented to the issuance of a Commission order, based on the entry of the injunction in the federal court action, that will permanently bar him from association with any broker or dealer. SBI ceased to be a registered broker-dealer in November 2003. Calugar and SBI consented to the final judgment and Commission order without admitting or denying the allegations.
In addition to $72 million that Calugar previously paid in settlement of a class action lawsuit, the $103 million that he has agreed to pay in settlement of the Commission’s action has been placed in an escrow account which the Commission will seek to have distributed to harmed investors. The total of $175 million represents the trading profits that the Commission alleged that Calugar received through his illegal conduct. In addition, pursuant to the Fair Funds provision of the Sarbanes-Oxley Act of 2002, the Commission will also seek to have the $50 million penalty distributed to victims of the violations.
In December 2003, the Commission filed an emergency action in federal court seeking an asset freeze, preliminary injunction, and other relief against Calugar and Security Brokerage. The Commission’s complaint alleges that from at least 2001 to 2003, Calugar reaped profits of approximately $175 million through improper late trading and market timing, principally through mutual funds managed by Alliance Capital Management and Massachusetts Financial Services (MFS). The complaint alleges that Calugar routinely transmitted trading decisions for his own account through Security Brokerage one to two hours after 4:00 p.m. EST (the close of the market) without any legitimate reason, and that Security Brokerage created false internal records in which the order time for all trades was entered as 3:59 p.m. EST.
The Commission’s complaint further alleges that from at least March 2001 to September 2003, the defendants engaged in extensive market timing of Alliance and MFS funds despite knowing that the prospectuses for those funds either prohibited or discouraged timing and that timing was not available to most investors. In the case of Alliance, Calugar agreed to make long-term investments (referred to as “sticky assets”) in Alliance hedge funds in exchange for Alliance permitting him to engage in market timing in its mutual funds. Calugar was the single largest timer at Alliance during the relevant period, according to the complaint.
The complaint alleges that Calugar and SBI violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 under the Exchange Act.
For further information, see Litigation Release No. 18524 (December 24, 2003).