## Facts

- Canary Capital Partners, LLC and related Canary entities (defendants) operated a hedge fund business directed by Edward J. Stern.
- From 2000 to 2003, Canary allegedly engaged in a daily scheme of “late trading” of mutual-fund shares—placing orders after 4:00 p.m. but receiving that day’s net asset value (NAV) rather than the next day’s NAV.
- The New York Attorney General alleged that late trading let Canary trade on post-close information while locking in stale pricing, extracting tens of millions of dollars from dozens of mutual funds at the expense of long-term, buy-and-hold shareholders.
- During the declining markets of 2001 and 2002, Canary allegedly used late trading to functionally “sell mutual funds short,” causing funds to overpay for redeemed shares as prices fell and increasing long-term investors’ losses.
- Over the same 2000–2003 period, Canary allegedly entered into agreements with dozens of mutual-fund families to engage in “market timing” (rapid in-and-out trading) across many funds.
- The complaint alleged that, as part of these market-timing arrangements, some fund managers or intermediaries gave Canary preferential treatment, including allowing timing despite fund policies and, at times, waiving early-redemption fees—directly depriving funds of money meant to offset timing-related harms.
- These preferential arrangements were allegedly not disclosed to mutual-fund investors, even though many prospectuses contained statements that timing was discouraged or that fund managers worked to detect and stop it.
- On September 3, 2003, the State of New York, by Attorney General Eliot Spitzer, filed a civil enforcement action in the Supreme Court of the State of New York, County of New York (Index No. 402830/2003), alleging fraudulent and illegal practices under the Martin Act and Executive Law § 63(12).

## Issues

1. Whether Canary’s alleged late trading—placing mutual-fund orders after 4:00 p.m. while receiving that day’s NAV—constituted fraudulent or deceptive conduct actionable under New York’s Martin Act.
2. Whether Canary’s alleged market-timing arrangements, including undisclosed preferential access and fee waivers that conflicted with prospectus disclosures, constituted fraud or illegality under the Martin Act and Executive Law § 63(12).
3. Whether the alleged multi-year pattern of late trading and timing qualified as “repeated fraudulent or illegal acts” under Executive Law § 63(12), supporting broad injunctive and monetary relief.

## Decision

- The case did not produce a published judicial merits opinion; it is commonly cited by its New York Supreme Court index number and the Attorney General’s complaint.
- The enforcement action was resolved through settlement rather than litigated findings, with Canary agreeing to stop the challenged trading practices and provide cooperation to the Attorney General’s ongoing investigation.
- As publicly reported in connection with the Attorney General’s announcement of the action, Canary agreed to substantial monetary relief (including restitution and penalties) and trading-related restrictions, without admitting or denying the allegations.

## Legal Principles

- New York’s Martin Act (GBL art. 23-A, including § 352-c) authorizes the Attorney General to seek injunctive and monetary relief for fraudulent or deceptive practices in connection with the offer, sale, or purchase of securities in or from New York.
- Executive Law § 63(12) authorizes the Attorney General to seek injunctions, restitution, and related relief where a defendant engages in repeated fraudulent or illegal acts or otherwise carries on business in a persistently unlawful manner.
- Mutual funds are generally required to use “forward pricing,” meaning orders received after 4:00 p.m. must be priced at the next calculated NAV; trading after the close while receiving the same day’s NAV can be treated as deceptive conduct because it defeats the pricing rule and shifts value from long-term shareholders.
- Secret arrangements that permit market timing, waive fees, or otherwise grant preferential access—particularly where fund disclosures represent that timing is discouraged or restricted—can be treated as materially misleading conduct toward investors and a basis for fraud-based enforcement.

## Conclusion

In *State of New York v. Canary Capital Partners, LLC*, the New York Attorney General alleged that from 2000 to 2003 Canary repeatedly late traded mutual-fund shares and entered undisclosed market-timing arrangements that conflicted with fund disclosures and harmed long-term shareholders, asserting enforcement authority under the Martin Act and Executive Law § 63(12); the matter ended by settlement without a published court decision.


State of New York v. Canary Capital Partners, LLC, No. 402830/03 (2003)