N.Y. Probe Spotlights Mutual Fund Practices Allowing Illegal Trades; Investors Are Losing Billions; Canary hedge fund sings, implicating BofA, Janus and other fund families.(A)

Byline: KEN HOOVER

New York Attorney General Eliot Spitzer, fresh from victory over top Wall Street investment banks, launched a probe Wednesday targeting illegal mutual fund practices that he said cost ordinary investors billions of dollars a year.

In a settlement, New York hedge fund manager Edward Stern and his Canary Capital Partners funds agreed to pay $40 million in restitution and fines for illegal trading of mutual fund shares. He will also cooperate with Spitzer's investigation against mutual fund families that helped him.

The complaint filed in court implicates major fund families, most directly Bank of America's Nations Funds, said Spitzer. Also implicated are Janus, Bank One and the Strong fund families.

"The full extent of this complicated fraud is not yet known," Spitzer said. "But one thing is clear. The mutual fund industry operates on a double standard. Certain companies and individuals have been given the opportunity to manipulate the system."

Illegal Fund Trades

Canary had arrangements with 30 fund families that let Stern trade their funds at the prior day's price or get arbitrage profits by timing quick purchases and sales of the funds, Spitzer said. (For a fuller explanation of how Canary operated, see story on page A10.)