On September 3, 2003, New York Attorney General Eliot Spitzer announced the issuance of a complaint against New Jersey hedge fund company Canary Capital Partners LLC, charging that they had engaged in "late trading" in collusion with Bank of America's Nations Funds.
Spitzer's investigation was initiated after his office received a ten-minute June 2003 phone call from a Wall Street worker alerting them to an instance of the late trading problem.
Bank of America stated that it would compensate its mutual fund shareholders for losses incurred by way of the illegal transactions.
"Late trading" occurs when traders are allowed to purchase fund shares after 4:00 p.m. at that day's closing price.
An ostensibly harmless practice developed where mutual funds let it be known that they could be flexible about taking purchases at that morning’s price after the closing, even though that was prohibited by their rules.
People were beginning to realize unanticipated uses for computer technology, in particular people realized they could track what was happening to the value of any mutual fund’s investments as quickly or even quicker than the mutual fund managers could using relatively simple spreadsheet programs.
The trades involved small variances in price but because the buyers were purchasing millions of dollars in mutual fund shares the guaranteed profits for these insiders was significant and secure.
Following the announcement of Spitzer's complaint, the SEC launched its own investigation of the matter which revealed the practice of "front running".
In December, Invesco (market-timing) and Prudential Securities (widespread late trading) were added to the list of implicated fund companies.
Nearly all of the fund firms charged by Spitzer with allowing market timing or late trading had settled with his office and the SEC between mid-2004 and mid-2005.
In September 2005 Spitzer's office reached a plea bargain in a case brought against three executives charged with fraud for financing Canary and assisting its improper trading in mutual funds.
The United States Second Circuit reversed the District Court In United States Security Commission v O`Malley on 19 May 2014 finding there was no consistent rule prohibiting Traders from engaging in market timing and therefore there was no requirement to disgorge profits made thereunder.