State of New York v. Canary Capital Partners, LLC

Canary Capital Partners, LLC (Canary) (defendant) was a hedge-fund company that engaged in trading with mutual-fund management companies. From 2000 to 2003, Canary engaged in a scheme of late trading of mutual-fund shares on a daily basis. Canary targeted dozens of mutual funds and extracted tens of millions of dollars from them. By late trading, Canary deprived long-term buy-and-hold investors in the mutual fund. During the declining market of 2001 and 2002, Canary used late trading to effectively sell mutual funds short, causing mutual funds to overpay for their shares as the market went down and magnifying long-term investors’ losses. During the same period of 2000 to 2003, Canary entered into agreements to engage in market timing with dozens of mutual-fund families, allowing it to time many different mutual funds. Sometimes the fund manager would waive applicable early-redemption fees and directly deprive the fund of money that would have partially reimbursed the fund for the impact of timing. Such arrangements were never disclosed to mutual-fund investors. Many of the relevant mutual-fund prospectuses contained materially misleading statements assuring investors that the fund managers discouraged and worked to prevent mutual-fund timing. In 2003, the New York attorney general filed a complaint against Canary, alleging that Canary’s late trading and timing schemes were fraudulent and illegal and that Canary benefitted to the extent of tens of millions of dollars at the expense of mutual-fund investors.