Full opinion text
OPINION SWEET, District Judge. TABLE OF CONTENTS I. Prior Proceedings.........................................................382 II. Findings of Pact..........................................................382 A. The Parties..........................................................382 1. The Plaintiff......................................................382 2. The Defendants...................................................382 3. The Relief Defendant..............................................383 B. The Operation of Mutual Funds.........................................383 C. Market Timing.......................................................385 D. Late Trading.........................................................389 E. Market Regulation....................................................390 F. Market Timing by PCM...............................................393 G. Late Trading by PCM.................................................398 III. Conclusions of Law.......................................................410 A. The Applicable Standard...............................................410 B. The SEC Has Not Established Liability for Defendants’ Market Timing.....412 C. Defendants Engaged in Fraudulent Late Trading.........................418 D. Aiding and Abetting Liability...........................................423 IV. Damages and Injunctive Relief.............................................423 A. The Claims for Relief are Not Time Barred..............................423 B. Injunctive Relief......................................................424 C. Defendants and Relief Defendant are Jointly and Severally Liable ..........424 D. Disgorgement........................................................425 1. The Standard for Disgorgement.....................................425 2. Disgorgement of $38,416,500 is Ordered..............................425 E. Civil Penalties of $38,416,500 are Imposed................................427 V. Conclusion...............................................................428 On April 3, 2008, the Securities and Exchange Commission (“Plaintiff’ or “SEC”) commenced the instant enforcement action against defendants Pentagon Capital Management PLC (“PCM” or “Pentagon”), Lewis Chester (“Chester”) an¿ relief defendant Pentagon Special Purpose Fund, Ltd. (“PSPF”) (collectively, the “Defendants”), alleging that PCM and Chester had orchestrated a scheme to defraud mutual funds in the United States through late trading and deceptive market timing in violation of Section 17(a) of the Securities Act of 1933 (“Securities Act”), 15 U.S.C. § 77q(a), Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, thereunder. In the alternative, the SEC asserted a claim of aiding and abetting violations of Section 10(b) and Rule 10b-5. The following findings of fact and conclusions of law result from the evidence presented at the bench trial and all the prior proceedings. Based on the findings and conclusions, the Court grants in part and denies in part the relief sought by the SEC and will enter judgment providing injunctive relief, disgorgement of $38,416,500 and civil penalties of $38,416,500. PCM, a British hedge fund, traded the shares of mutual funds from 1999 through September 2003 on the New York Stock Exchange. This trading included two practices challenged by the SEC in this action as securities violations, namely, market timing and late trading. The issues surrounding these practices are complicated and controversial as evidenced by the eighteen witnesses and the many hundreds of exhibits presented by the able and skilled counsel. The entire record establishes that the Defendants did not violate the securities law by pursuing a strategy of market timing, but did violate the securities laws by engaging in late trading, thereby entitling the SEC to judgment. I. PRIOR PROCEEDINGS This case was initiated by the SEC on April 3, 2008. (Dkt. No. 1.) On August 1, 2008, Defendants filed a motion to dismiss. (Dkt. No. 11.) On September 9, 2008, the SEC filed an amended complaint (Dkt. No. 15), and on October 8, 2008, Defendants again moved to dismiss (Dkt. No. 23). That motion was heard on December 3, 2008, and by an opinion of February 9, 2009 it was denied. SEC v. Pentagon Capital Management PLC, 612 F.Supp.2d 241 (S.D.N.Y.2009). On March 16, 2011, the SEC moved for partial summary judgment, (Dkt. No. 92.) That motion was heard on April 5, 2011 and denied in open court and then by memo endorsement on April 22, 2011 (Dkt. No. 141). Beginning on April 12, 2011, the bench trial was conducted over seventeen days, ending May 4, 2011. The eighteen witnesses included: Professor Lawrence Harris, Samuel Engelson, Scott Christian, Lewis Chester, Carl Heppenstall, Seth Gersch, Thomas Feretic, Philip Hetzel, Said Haidar, Matthew Perrone, Justin Ficken, Dino Coppola, Gregory Trautman, Professor Jonathan Macey, Dr. Anthony Profit, Edward Stern, Conrad Ciccotello, and Jafar Omid. Final argument was heard on September 27, 2011. II. FINDINGS OF FACT A. The Parties 1. The Plaintiff The SEC is the federal agency, established following the stock market crash of 1929, that is charged with enforcing federal securities laws and regulating the national securities markets. 2. The Defendants In the 1980’s Jafar Omid (“Omid”) and David Chester, defendant Chester’s father (“Chester, Sr.”), were partners in an accounting firm in the United Kingdom and formed a wealth management advisory firm, Booth Anderson Investment Services, which traded European mutual funds using a dynamic asset allocation strategy. The term “dynamic asset allocation” is a British or European term for what Americans called “market timing.” The strategy sought to generate profits based on buying and selling mutual funds as markets moved up or down, Chester, Sr. believed that as markets were moving up, investors should be invested in equity mutual funds, and when markets were moving down, they should be invested in cash. To assist in this determination, Chester, Sr. developed a basic statistical analysis. In 1998, Chester joined the firm and Chester, Sr. retired for health reasons. Until 2003, Chester served as PCM’s Chief Executive Officer. Chester is a graduate of the University of Oxford in England, the College of Law in London, and the Harvard Business School. He is also qualified as a solicitor in England and Wales and, prior to joining PCM, Chester summered at the law firm White & Case in the United States and worked for three years as an international corporate attorney at the London law firm Linklaters & Paines. Following Chester Sr.’s departure, the business continued under the name Pentagon Capital Management. Chester and Omid soon thereafter hired a team of mathematicians to computerize Chester, Sr.’s original methodology. Using these computer models, PCM traded unitized collective investment trusts, ie., European mutual funds, in the European markets. The models were developed by performing a regression analysis which compared European mutual funds to various indices such as the Nikkei and FTSE 100. When the model found that a fund tracked an index or indices, the fund would become a candidate for trading, since a correlation-ship between the performance of the fund and the performance of an index provided a predictive value as to the fund’s future price movement. As each fund was analyzed and found to track a particular index or indices, it would be added to a basket of similar funds. At the end of each day, the computer model would provide a signal indicating whether the funds in each basket should be bought, sold or held depending on how it tracked against the correlated index or indices. That signal—buy, sell or hold—was then communicated to PCM’s brokers. 3. The Relief Defendant PSPF is an international business company incorporated in the British Virgin Islands. In connection with trading U.S. mutual funds, PCM formed three Delaware limited liability companies (Pentagon Investment Partners, LLC, Pentagon Management Partners, LLC, and Pentagon Performance Partners, LLC), of which the PSPF was the sole member and manager. From 1999 to 2003, PCM was PSPF’s investment advisor responsible for making its trading decisions. B. The Operation of Mutual Funds Mutual funds consist of a basket of underlying equity holdings, and, as such, their value fluctuates as a function of the change in the value of the underlying shares. Professor Lawrence Harris, an SEC expert (“Professor Harris”), accurately described mutual funds and their operation. Portions of his report (SEC Ex. 420) follow: Mutual funds are investment companies whose sole purpose is to invest in securities on behalf of their shareholders. The directors of investment companies hire investment managers, who are paid out of the assets of the fund, to manage the company. The investment managers choose the securities held by the mutual fund. The securities typically are publicly traded stocks or bonds issued by corporations or governmental agencies. The shareholders of a mutual fund are its investors. Mutual funds are called pooled investments because mutual fund investors pool their money together for management by a professional manager. When investors want to buy fund shares, the fund issues new shares in exchange for cash deposited by the investors. When existing investors want to sell their shares, the fund redeems (repurchases) those shares by paying the investors cash in exchange for their shares. The directors of open-end mutual funds hire distribution agents to help arrange and settle their trades. The distribution agent is generally a company affiliated with the investment manager. The managers of an open-end fund, or agents hired by the fund, set the prices at which the deposit and redemption transactions occur. * * * The managers (or their agents) generally set the deposit and redemption price at their best estimate of the value of a share in the mutual fund, which is called the fund’s net asset value (NAV), The aggregate net asset value of the fund is the total value of the fund’s assets, less any liabilities that the fund may have. Funds compute their NAV by dividing the aggregate net asset value by the total number of mutual fund shares outstanding. For example, suppose that Mutual Fund ABC owns 100 shares of Stock A and 200 shares of Stock B. If Stocks A and B were respectively valued at $20 and $40 per share, the total net asset value of the fund would be 100 x $20 + 200 x $40 = $10,000. If the mutual fund had 400 shares outstanding, the NAV of the fund would be $10,000 -¡- 400 = $25 per share. Suppose a new investor buys 200 shares of Fund ABC at $25 per share. After the transaction, the total net asset value of the Fund will increase by $5,000 to $15,000 and the total shares outstanding will increase to 600 shares. However, the NAV of the fund will remain at $25 = $15,000 -h 600 dollars per share. The NAV of a fund following a deposit or redemption transaction does not change if the transaction price takes place at the NAV. Deposit (investor purchase) and redemption (investor sale) transactions in open-end mutual funds are always executed after the normal closing time of the stock and bond markets. In general, traders must place their orders before 4:00 PM Eastern Time. The fund’s NAV is generally computed from last trade prices recorded as of 4:00 PM Eastern Time. If the fund managers believe that the last observed price of a security held by the fund does not fairly represent its current value, the managers may specify a different price. This process is called fair valuation. Managers who fair value their portfolios risk choosing the wrong prices for their securities. For example, although the best estimate of the 4:00 PM value of Stock B in the example above, made on the basis of movement of similar stocks, may be $40.40, Stock B might actually be worth $40 because some negative news specific to Stock B counteracted the market-wide price rise. If so, the use of a $40.40 estimate of the value of Stock B would cause the NAV of the fund be too high. Any purchasers of the fund would receive too few shares and any sellers would receive too much cash. When computing NAVs, managers rarely specify prices different from last observed prices for their portfolio securities because they are afraid of the mistakes, and thus the associated liability, that may result from fair valuation. They prefer to use last observed prices because the computation of NAVs based on such prices does not require any judgment. Although the failure to fair value a portfolio commonly creates NAVs that inaccurately value their funds, managers generally have not been concerned about the liability associated which such mistakes because the principle of valuation based on last observed prices is objective and well accepted. Fund managers must set the price at which they allow investors to transact at their best estimate of the NAV to ensure that they treat all shareholders fairly. These shareholders include purchasers, sellers, and the vast majority of shareholders who on any given day merely retain their shares. If purchasers could buy shares for less than they are worth, the purchasers would profit and the retaining shareholders would lose. The purchasers would profit and the retaining shareholders would lose because the proportionate increase in the number of shares in the mutual fund would be greater than the proportionate increase in the total value of the fund’s assets. The retaining shareholders suffer dilution because the purchasing shareholders contribute less to the fund than their proportionate share of ownership. * * * As noted, when setting NAVs, fund managers also must be mindful of sellers as well as purchasers and retaining shareholders. If investors could sell shares for more than their worth, they would gain at the expense of the retaining shareholders. The selling investors would gain by avoiding a loss, because the shares that they tendered would be less valuable than the cash that they would receive in exchange. The retaining shareholders would lose because the proportionate decrease in the number of shares in the mutual fund would be less than the proportionate decrease in the aggregate value of the fund’s assets. The retaining shareholders would suffer dilution because the selling shareholders would have taken out more than their proportionate share of the value of the fund. C. Market Timing As the Second Circuit has described: “Market timing” refers, inter alia, to buying and selling mutual fund shares in a manner designed to exploit short-term pricing inefficiencies. A mutual fund sells and redeems its shares based on the fund’s net asset value (“NAV”) for that day, which is usually calculated at the close of the U.S. markets at 4:00 P.M. Eastern Time. Prior to 4:00 P.M., market timers either buy or redeem a fund’s shares if they believe that the fund’s last NAV is “stale,” i.e., that it lags behind the current value of a fund’s portfolio of securities as priced earlier in the day. The market timers can then reverse the transaction at the start of the next day and make a quick profit with relatively little risk. Mutual funds ... that invest in overseas securities are especially vulnerable to a kind of market timing known as “time zone arbitrage,” whereby market timers take advantage of the fact that the foreign markets on which such funds’ portfolios of securities trade have already closed (thereby setting the closing prices for the underlying securities) before the close of U.S. markets. Market timers profit from purchasing or redeeming fund shares based on events occurring after foreign market closing prices are established, but before the events have been reflected in the fund’s NAV. In order to turn a quick profit, market timers then reverse their positions by either redeeming or purchasing the fund’s shares the next day when the events are reflected in the NAV. SEC v. Gabelli, 653 F.3d 49, 53 (2d Cir.2011) (citations omitted). Professor Harris accurately described the practice of market timing. Portions of his report follow: Market Timing Strategies Some traders can occasionally estimate a fund’s NAV more accurately than can the fund managers. When such traders expect that a fund’s computed NAV likely will be less than its actual NAV, they will buy the fund. If they are correct, they will profit when the NAV of the fund eventually rises to its correct value. This' strategy is called market timing, and such traders are called market timers. The market timing strategy can also work in reverse. If market timers own fund shares that they believe will be overvalued by the fund, they will sell their shares to avoid losses that they would otherwise incur when the NAV eventually drops to its correct value. Market timing causes the retaining shareholders to experience dilution. The profits that market timers earn when buying, and the losses they avoid when selling, reduce the returns that the other shareholders obtain from their fund investments. Market times generally are short-term traders. They usually sell their positions within a week of acquiring them, though some market timers may wait longer for an opportunity to profitably exit the fund. While invested in a fund, market timers may hedge their positions in the futures markets to reduce the risks of fund ownership. For example, a market timer may sell S & P 500 Index futures contracts while invested in a large cap equity index fund. If prices fall, the profits on the short futures contract position will offset losses from the mutual fund investment. If prices rise, the profits from the mutual fund investment will offset the losses from the short futures contract position. To protect their shareholders from market timers, many funds have adopted various policies designed to prevent market timing. These policies may restrict the number of trades that investors may make in a fund, or they may impose minimum holding periods for investors. These policies do not harm long term investors that the funds seek to serve, but they discourage or prevent short-term trading by market-timers. Identifying Market Timing Mutual funds most often misvalue their portfolios when prices are changing rapidly. The uncertainty associated with large price changes makes their valuation problems difficult. For example, mutual funds that hold portfolios of international stocks must value these portfolios as of 4:00 PM Eastern Time. At that time, the home markets in which these stocks trade generally have been closed for 5 to 16 hours, depending on their locations. Accordingly, the prices last observed in these market often are quite stale. If significant events occur after these markets close, the last closing prices in these home markets will not reflect the effects of these events on security values until the markets next open. Many such events also affect U.S. securities markets. Market timers therefore often buy international mutual funds (U.S.domiciled mutual funds that invest in international securities) when the U.S. markets rise substantially more than the foreign markets that closed earlier. Market timers may also buy when the U.S. markets rise in response to news that was disseminated after the foreign markets closed. Although international mutual funds sometimes fair value-adjust their NAVs to avoid this problem, the adjustments often are not large enough. Accordingly, market timers often buy international funds on days when their NAVs rise with the expectation that NAV will rise again on the next day. The international mutual funds generally correct these misvaluations on the next day, after they have observed new prices in the foreign markets. Accordingly, market timing trades in such funds often show profits by the next trading day. These comments suggest that three characteristics identify market timing: a. High frequency, short-term trading; b. Purchases on days when market in-dices and reported NAVs rise and sales on days when market indices and reported NAVs fall; c. Extraordinary profits on purchases and extraordinary avoided-losses on sales that, on average, accrue the next day but which cease to accrue after that day. Any of these characteristics is indicative of market timing. When all are found together, they strongly indicate market timing. (SEC Ex. 420.) As Professor Harris accurately described at trial, market timing harms long-term fund investors by diluting the value of their shares: Q. Can market timing and late trading have an effect on the value of other investors’ shares of the mutual funds in which such trading takes place? A. Yes. This is called dilution____[Suppose that the mutual fund has decided that its shares are worth $10 a share, and it is willing to allow investors to buy those shares for $10 a share. But for whatever reason suppose in fact that those shares are actually worth ... $11 a share. So anybody who can buy those shares at $10 is receiving $11 in value. So if no transactions take place ... the existing shareholders will eventually get the full value of their shares, which is to say that tomorrow prices will rise to $11 if the information becomes revealed and the existing shareholders will profit to the full extent of that rise. If, however, the fund allows new shareholders to buy ... at $10 a share, those new shares will participate in the increase in the value of the fund ... [which] means that the existing shareholders will have to share their gains with the new shareholders. That process is called dilution because there are now more shares that will share in the gain to the fund as the funds’ value rises from 10 to 11. Note though that the new shareholders, they will be buying at $10 a share, something that is worth 11. So they will make a profit from this transaction. The profit comes from the other shareholders, and ... their profit is exactly equal to the losses from the existing shareholders.... So that is dilution on a purchase. On the sale, let’s set up that situation as a similar circumstance. So once again, let’s assume that the fund believes its shares-are worth $10 a share but in fact ... the actual value of the fund is now $9. So anybody who can sell their shares on that information will be able to make a dollar a share of losses avoided. So they will avoid losing a dollar when the fund drops from $10 to, presumably, $9 the next day. So if nobody sells then-shares, then those losses will be distributed evenly over all the existing shareholders. But if some of the shareholders are able to sell, they will receive $10 of something that is actually only worth $9, which it means that all of the other shareholders will have to share the losses—they will share the total amount of the losses, but now there are fewer of them and so their loss per share will be greater than it otherwise would be. The losses that the exiting shareholders avoid will be losses that the remaining shareholders will incur and that, again, is called dilution although in this case it seems to work backwards. But, again, it is a loss to the existing shareholders. So the ability to do a market timing strategy ... in which you can buy shares at a price less than their actual value or sell shares at a price above their actual value, that process causes dilution and losses to the other shareholders .... (Tr. 99-102.) In addition, as the Court of Appeals has recognized: [MJarket timing can harm long-term investors in the fund by raising transaction costs for a fund, disrupting the fund’s stated portfolio management strategy, requiring a fund to maintain an elevated cash position to satisfy redemption requests, resulting in lost opportunity costs and forced liquidations ... unwanted taxable capital gains for fund shareholders and a reduction of the fund’s long term performance. Gabelli, 653 F.3d at 53 (citations and internal quotations and alterations omitted); see also Janus Capital Group, Inc. v. First Derivative Traders, — U.S. -, 131 S.Ct. 2296, 180 L.Ed.2d 166 (2011) (finding that market timing “harms other investors in the mutual fund.”); SEC v. PIMCO Advisors Fund Mgmt. LLC, 341 F.Supp.2d 454, 458 (S.D.N.Y.2004) (“[M]arket timing ... can also harm investors ... by increasing trading and brokerage costs, as well as tax liabilities, incurred by a fund and spread across all fund investors ... [and] market timing may also hinder the ability of mutual fund managers to act in the best interest of fund investors who seek to maximize their long-term investment gains.”); First Lincoln Holdings, Inc. v. Equitable Life Assurance Soc’y, 164 F.Supp.2d 383, 390-94 (S.D.N.Y.2001) (discussing the detrimental effects of market timing on long-term mutual fund investors). As testified by Professor Jonathan Macey (“Professor Macey”), one of the Defendants’ experts, market timing was ubiquitous during the 1999 through 2003 time period. (Tr. 1466.) Professor Conrad Ciceotello (“Professor Ciccotello”), one of the Defendants’ experts, testified that mutual fund complexes knew of market timing, and that 40 of the 80 largest mutual fund families had at some point entered into capacity agreements, whereby they permitted market timing by certain investors. (Tr. 1869-72.) See also PIMCO Advisors Fund Mgmt., 341 F.Supp.2d at 460-61 (“According to the SEC investigations, press reports, allegations in complaints, and expert commentary, many mutual fund companies engaged in huge volumes of undisclosed transactions with Canary and other market timers during the period at issue.”) Mutual funds sought to uncover and reject trades by market timers. The industry termed this effort “kick outs.” Three mutual fund witnesses testified at trial and four by deposition about the steps taken to restrict market timers and to bar their trading. (Carl Heppenstall (American Century) Tr. 874-91; Philip Hetzel (Federated) Tr. 1036-42; Matthew Perrone (Dryfus) Tr. 1166-71; Barbara Sleiman (Evergreen) Dep. Tr. 30-33, 60-64; Ellen Bradley (MFS) Dep. Tr. 6-7, 10, 40-60, 78, 91-92, 190-91, 196-8, 213-17; John Mari (Janus) Dep. Tr. 122-23; Henry Brennan (Alliance Capital) Dep. Tr. 27-8, 33-35, 63-4, 73, 95,115-9,124.) The prospectuses of many of the funds traded by the Defendants contained provisions granting the funds the right to reject trades considered by the funds to be market timing trades. (SEC Ex. 420A-499.) D. Late Trading Professor Harris accurately described the practice of late trading. Portions of his report follow: The Late Trading Strategy Traders must submit orders to trade open-end mutual funds before 4:00 PM if they want the orders filled on that day. Orders submitted after 4:00 PM are late orders. Brokers are supposed to hold late orders for execution on the next trading day. Late trading results when brokers allow late orders to execute on the same day instead of the next day. Late trading is an extreme form of market timing. It can be very profitable when traders know that their late orders will be executed on the same day. Funds compute the NAVs that they use to price deposit and redemption orders from security prices last observed as of 4:00 PM. If values subsequently change, these NAVs would no longer reflect the actual value of the funds. Late traders who submit buy orders when values rise after 4:00 PM tend to profit from buying undervalued funds because the NAVs of those funds tend to rise on the next day. Those who submit sell orders when values fall after 4:00 PM tend to avoid losses from holding overvalued funds because the NAVs of those funds tend to fall on the next day. In both cases, their profits and losses-avoided result in dilution to the other shareholders, for the same reasons described above in the discussion of market timing. Events that convey material information about security values often occur after 4:00 PM. For example, many corporations and governmental agencies deliberately wait until after the 4:00 PM close of the normal trading session to release significant news. Traders who observe these announcements sometimes can infer that prices will change substantially on the next day. Late traders thus pay close attention to these news events to determine whether, and how, they will affect values. Trading in equity index futures contracts and in some securities continues after the 4:00 PM close of the regular trading sessions at U.S. equity markets. The futures markets continue to trade until 4:15 PM. Many equity index futures contracts resume trading at 4:30 PM and continue to trade throughout the night. Many equity markets have extended trading sessions in which traders can continue to trade stocks in electronic trading sessions from 4:00 PM until 5:30 PM or later. Trading after 4:00 PM in these contracts and securities can be quite active when traders respond to significant news first released after 4:00 PM. Late traders thus do not need to interpret news events to trade successfully. They simply follow price changes in these after-hours markets. When those prices rise, the value of mutual funds that hold similar assets will also rise. Late traders thus tend to buy mutual funds when the prices of securities and contracts have risen significantly after 4:00 PM. They tend to sell funds when prices have fallen significantly after 4:00 PM. (SEC Ex. 420.) Almost all mutual funds require that trades be placed by 4:00 p.m. ET in order to receive that day’s NAV. The SEC submitted 82 mutual fund prospectuses from the relevant time period, covering 116 mutual funds late traded by Defendants, which required that trades be placed by 4:00 p.m. ET in order to receive that day’s NAV. (SEC Exs. 419A, 420A, 421-499.) Additionally, three witnesses from mutual funds testified at trial that 4:00 p.m. ET was the order deadline (Carl Heppenstall (American Century) Tr. 870, 873, 892-893; Philip Hetzel (Federated) Tr. 1046-7, 1050-3; Matthew Perrone (Dryfus) Tr. 1173-6, 1203), as did five witnesses by deposition submitted at trial. (Barbara Sleiman (Evergreen) Dep. Tr. 84-85; Ellen Bradley (MFS) Dep. Tr. 24-29, 209-10, 218-9; John Mari (Janus) Dep. Tr. 35-36, 69-70; Henry Brennan (Alliance Capital) Dep. Tr. 70, 119, 120; Ira Cohen (AIM) Dep. Tr. 89-90; Stephen Adamsky (Ivy) Dep. Tr. 94-99.) E. Market Regulation On October 16, 1968, the SEC announced the adoption of Rule 22c-l under the Investment Company Act, 17 C.F.R. § 270.22c-l. Rule 22c-l provides that “[n]o registered investment company issuing any redeemable security ... shall sell, redeem, or repurchase any such security except at a price based on the current net asset value of such security which is next computed after receipt of a tender of such security for redemption or of an order to purchase or sell such security.” 17 C.F.R. § 270.22c-l. “The rule is commonly referred to as the ‘forward pricing rule’ because the price assigned to mutual fund shares is not assigned until after the time an order is placed by an investor. The rule creates a requirement that the price of mutual fund shares be set at the NAV ‘next computed’ by the mutual fund company after the receipt of the order to buy or sell the shares in question.” SEC v. Simpson Capital Mgmt., Inc., 586 F.Supp.2d 196, 202 (S.D.N.Y.2008). At the same time it adopted Rule 22c-l, the SEC issued a release entitled “Adoption of Rule 22c-l Under the Investment Company Act of 1940 Prescribing the Time of Pricing Redeemable Securities for Distribution, Redemption, and Repurchase, and Amendment of Rule 17a-3(a)(7) Under the Securities Exchange Act of 1934 Requiring Dealers to Time-Stamp Orders” (the “Adopting Release”). See Release No. 5519, 1968 WL 87057 (Oct. 16, 1968). (SEC Ex. 72.) The Adopting Release provides in part as follows: One purpose of Rule 22c-l is to eliminate or reduce so far as reasonably practicable any dilution of the value of outstanding redeemable securities of registered investment companies through (i) the sale of such securities at a price below their net asset value or (ii) the redemption or repurchase of such securities at a price above their net asset value. Dilution through the sale of redeemable securities at a price below their net asset value may occur, for example, through the practice of selling securities for a certain period of time at a price based upon a previously established net asset value. This practice permits a potential investor to take advantage of an upswing in the market and an accompanying increase in the net asset value of investment company shares by purchasing such shares at a price which does not reflect the increase .... Another purpose of Rule 22e-l is to eliminate or reduce so far as reasonably practicable other results, aside from dilution, which arise from the sale, redemption, or repurchase of securities of registered investment companies and which are unfair to the holders of such outstanding securities. The Commission believes that the practice of selling securities for a certain period of time, at a price based upon a previously established net asset value, encourages speculative trading practices which so compromise registered investment companies as to be unfair to the holders of their outstanding securities. This pricing practice allows speculators to buy large blocks of such securities under circumstances where the net asset value of the securities has increased but where the increase in value is not reflected in the price. The speculators hold such securities until the next net asset value is determined and then redeem them at large profits. These speculative trading practices can seriously interfere with the management of registered investment companies to the extent that (i) management may hesitate to invest what it believes to be speculators’ money and (ii) management may have to effect untimely liquidations when speculators redeem their securities .... 1968 WL 87057, at *l-*2. In addition to announcing the adoption of Rule 22c-l, the Adopting Release also announced that, as a companion measure, the SEC was amending Rule 17a-3(a) under the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq., which sets forth the types of records that broker-dealers must make and keep, to require all broker-dealers to maintain records of orders from customers showing, inter alia, the time the orders are received. 17 C.F.R. § 240.17a-3(a). The Adopting Release provided as follows: In order to implement Rule 22c-l under the Investment Company Act, the Commission, as a companion measure, has determined to adopt an amendment of Rule 17a-3(a)(7) under the Securities Exchange Act to require dealers, when ■ selling securities to, or buying securities from, a customer, other than a broker or dealer, to stamp on the memorandum of order the time of receipt. Brokers are already subject to such requirement under subparagraph (a)(6) of Rule 17a-3. 1968 WL 87057, at *3. On December 27, 1968, and again on January 9, 1969, the SEC staff issued a Staff Interpretive Position (the latter updating the former) regarding the adoption of Rule 22c-l and the Commission’s October 16, 1968 Release discussed above. See Staff Interpretive Positions Relating to Rule 22c-l, Release No. 5569, 1968 WL 87104 (Dec. 27, 1968) (SEC Ex. 73); Staff Interpretive Positions Relating to Rule 22c-l, Release No. 5569, 1969 WL 96373 (Jan. 9, 1969) (SEC Ex. 74). Both versions of the Staff Interpretive Position contain a hypothetical to the effect that orders to trade U.S. mutual funds at the current day’s NAVs have to be received before the funds’ pricing times. The January 9, 1969 Interpretive Position, issued at a time when the New York Stock Exchange closed at 3:30 p.m. ET, provided as follows: The following examples are intended to illustrate how the pricing provisions apply; The fund prices at 1:00 p.m. and 3:30 p.m. (a) A dealer receives a customer’s order before 1:00 p.m. The 1:00 p.m. price would be applicable and the dealer should assure that the order is received by the underwriter prior to 3:30 p.m. (b) A dealer receives a customer’s order after 1:00 p.m. but before 3:30 p.m. The 3:30 p.m. price would be applicable and the dealer should assure that the order is received by the underwriter prior to the close of the underwriter’s business day. (c) A dealer receives a customer’s order at 4:00 p.m. ET. The 1:00 p.m. price on the next business day would be applicable and the dealer should assure that the underwriter receives the order prior to 3:30 p.m. on such next day. 1969 WL 96373, at *2 (SEC Ex. 74). In an April 2001 letter, the SEC’s Associate Director and Chief Counsel of Investment Management, Douglas Scheldt, noted the prevalence of market timing strategies designed to capitalize on mispricing. See Letter from Douglas Scheidt, Assoc. Dir. and Chief Counsel, Div. of Inv. Mgmt., U.S. Sec. and Exch. Comm’n, to Craig S. Tyle, Gen. Counsel, Inv. Co, Inst., 2001 SEC No-Act. LEXIS 543 (Apr. 30, 2001) available at http://www.sec.gov/divisions/ investment/guidance/tyle043001.htm. The letter emphasized that mutual funds have a fiduciary duty to protect investors from any loss of value due to these strategies and evidenced that the Commission knew of these timing strategies. The letter gave no indication that the SEC intended to prohibit such strategies and proposed no regulatory action to prevent or deter market timing. On September 3, 2003, the New York Attorney General (“NYAG”) announced a settled enforcement action against hedge fund Canary Capital Partners, LLC (“Canary Capital”) for violations of the New York State Martin Act through, among other things, late trading of U.S. mutual funds. Chester and other PCM employees were aware of the Canary Capital settlement the day it was announced. (SEC Exs. 61, 62, 103; see also, SEC Ex. 522 (August 21, 2003 email from Matthew Embler, PCM employee, to Frank Bristow, head of trading at PCM, Omid, Anthony Profit (“Profit”), head of research and development for PCM, and PCM’s Capacity Team, saying “Talked about Spitzer, and Stern giving up capacity following the subpoena. Sounds like a main focus of the investigation is the unfair advantage from late-trading (maybe Scott at TWC was being straight with us after all?). Stern’s plight is letting [competitor Goodwin Trading] pick up a lot of capacity, because for obvious reasons (Goodwin is an ex-Stern guy) they’re already well connected with the same broker networks!”).) Stephen M. Cutler, then director of the SEC’s Division of Enforcement, testified in 2003 before the Senate Subcommittee on Financial Management that a written examination of 88 of the largest mutual fund complexes in the country revealed that more than 50% of the mutual fund groups had “one or more arrangements with certain shareholders that allow[ed] these shareholders to engage in market timing.” Mutual Funds: Trading Practices and Abuses that Harm Investors: Hearing Before S. Subcomm. on Fin. Mgmt., the Budget and Int’l Sec., Comm, on Gov’t’l Affairs, 108th Cong. 11-12 (Nov. 20, 2003) (statement of Stephen M. Cutler, Dir., Div. of Enforcement, U.S. Sec. and Exch. Comm’n) (“Cutler Testimony”). Prior to 2003, the SEC had never commenced an enforcement proceeding against any mutual fund, market timer, or securities firm for market timing. In April of 2004, following the announcement of the Canary enforcement action, the SEC adopted a market timing rule that requires mutual funds to describe in their prospectuses the risks, if any, that frequent purchases and redemptions may present to other shareholders; to state whether or not the fund’s board has adopted policies and procedures with respect to frequent purchases and redemptions, and, if not, to provide a statement of the specific basis for the view of the board that it is appropriate not to have such policies and procedures. See Final Market Timing Rule, 69 Fed.Reg. at 22,300. In addition, under the 2004 rule, U.S. mutual funds must describe their market timing policies with particularity as a requirement of registration. See SEC Form N-1A, available at http://www.sec.gov/about/ forms/formn-la.pdf. F. Market Timing by PCM In 1999 Chester was introduced to an American at Chronos Asset Management, from whom he learned that market-timing techniques were employed in the United States. (Tr. 479-80.) After this conversation, Chester began trading in mutual funds, using market timing techniques as described above, through CIBC, a U.S. broker-dealer. The broker utilized by PCM at CIBC was Michael Sassano (“Sassano”). Sassano had an assistant, James Wilson (“Wilson”). (Tr. 483-84.) In 2000, Wilson left CIBC and obtained employment at Paine Webber. At Paine Webber, he acquired an assistant named Scott Christian (“Christian”). (Tr. 490.) At Paine Webber, Wilson and Christian facilitated their customers’ market timing strategies in a number of ways, including making a series of purchases with small ticket amounts, such as $150,000 or $300,000, with the intention of not drawing too much attention to the size of the overall purchase. (Tr. 212-13.) Wilson and Christian also kept PCM’s names off its accounts. (SEC Ex. 15 (memorandum written by Chester following a May 5, 2000 meeting between Chester, Wilson and Christian stating that Wilson “agreed to code the names of our accounts, so that the Pentagon name does not appear on any of the accounts”); Tr. 495). Additionally, Wilson and Christian facilitated their customers’ market timing strategies by using multiple accounts. If Wilson and Christian were purchasing a small position and a customer was sending them millions of dollars, there were only so many mutual funds that could be purchased. Purchasing the same mutual funds by way of multiple accounts enabled them to break down their ticket amounts such as to avoid detection but nonetheless in aggregate make large purchases. (Tr. 214.) While at Pane Webber, Pentagon’s accounts were restricted from trading. In response, Pentagon continued to trade the same fund families that had restricted their trading by journaling money to other accounts to be purchased into the same fund family. Pentagon was aware that Wilson and Christian were trading the same group of mutual funds among different accounts. (Tr. 215-16.) Wilson and Christian were terminated from Paine Webber in August or September of 2000. (Tr. 224.) Wilson was accused by a Paine Webber back office employee of attempting to bribe her in exchange for information about what other brokers at Paine Webber with market timing clients were doing. (Id.) Chester testified that he had a different understanding as to why Wilson and Christian were terminated and that he believed that Wilson, “in a drunken stupor,” made inappropriate comments to a female employee at Paine Webber. (Tr. 502-03.) On September 25, 2000, Chester sent an email to Michael Sapourn (“Sapourn”), a U.S. trader, saying: “Just wanted to know how the various managers coped with last week. I assume some/all got caught on one day at least. Also, I’m sure you saw the article in WSJ on timers. Interested to hear your views as to whether there might be some repercussions as a result of this.” (SEC. Ex. 223.) Sapourn responded that he had noticed that “many” U.S. international fund families (ie., U.S.-based funds holding international securities) were “trying to stamp out timer activity” and that he was being coached by his brokers “as to when to ‘suspend’ our activity in order to stay off the radar screens of many of our Fund families. The strong will survive ...” (Id. (ellipsis in original)). After Wilson and Christian were terminated, a different broker, Scott Shedden (“Shedden”), and his assistant, Dino Coppola (“Coppola”) took over PCM’s accounts at Paine Webber. (SEC Ex. 18.) In November or December of 2000, Wilson and Christian obtained employment with Trautman Wasserman & Co., Inc., a small New York broker-dealer (“TW & Co.”). (Tr. 225.) Christian testified that in searching for a position following his termination from Paine Webber, he and Wilson were “looking for another company to facilitate market timing” and that they found that in TW & Co. (Id.) On February 15, 2001, PCM began trading through TW & Co. (SEC Ex. 126.) Defendants’ market timing involved the utilization of multiple broker-dealers, the use of multiple accounts at broker-dealers, keeping trades in small amounts that would avoid detection by mutual funds, and the use of multiple registered representative numbers by PCM’s brokers. This practice was referred to in the marketplace and in this litigation as “under the radar” trading. As described by Justin Ficken, PCM’s broker at Prudential, “ ‘under the radar’ is a term that we used as market timers, the phrase was to facilitate trades, to execute trades, to place trades with mutual funds without generating a block or a kick-out by the fund family.” (Tr. 1209.) Under the radar trading was designed to elude detection by “market timing police,” internal employees of investment advisers to mutual funds whose job it was to detect market timers and enforce the policies that the funds had in place. (Tr. 1211.) On PCM’s account opening documents at TW & Co., in response to the question “[d]oes customer object to disclosing his/ her name, address and security position to requesting companies in which he/she is a shareholder,” a box is checked “yes.” (SEC Ex. 235.) In an email on February 27, 2002, Quang Tran (“Tran”), a principal trader on the PCM trading desk, wrote to Matthew Heerwagen, a broker at Brown Brothers Harriman, as follows: When you do enquire with the Fund Families please do not mention our name. Anonymity is very important in Market Timing, the Fund Families should never know who is the underlying client.... With regards to the execution I need to be able to place trades as late as possible or close to the cut off point as possible. I’m looking to invest into a few funds in Europe to begin with, not just one fund family. In case they decide to terminate the agreement we wouldn’t be reliant on one fund family- (Ex. 133; Quang Tran Dep. Tr. 127-128.) In an undated email from Lewis Chester to Christopher Glassman, a broker at Morgan Stanley, Chester stated “[Booking at my notes from our meeting, I note that we can put our accounts through Morgan Stanley’s trust company, to ensure anonymity. Can you please do this for us on these new accounts.” (SEC Ex. 208.) Wilson and Christian used multiple registered representative numbers, or broker numbers, at TW & Co. YKA was Wilson’s registered representative number, and YKB was Christian’s registered representative number. Wilson and Christian also used registered representative numbers YKC, YKD, YKF, YKG, YEN, YKO, YLR, YLS, YLT, YLU, YLY, YLW, YLX, YL1, YL2, and YL3 to trade mutual funds at TW & Co. Christian prepared account opening forms for PCM to trade mutual funds using the registered representative numbers. (Tr. 275-80; SEC Ex. 901, 235.) Wilson and Christian used different registered representative numbers on accounts to shield the unitary nature of the accounts. Mutual funds would only see the name “Bank of America” on PCM’s accounts at TW & Co., and not Pentagon’s name. (Tr. 284-285; SEC Ex. 235, 237.) PCM opened accounts at U.S. broker-dealers in order to facilitate market timing as follows: • Brown Brothers Harriman—2 accounts • Charles Schwab—2 accounts • Concord—39 accounts • Investex—13 accounts • JP Morgan—4 accounts • Morgan Stanley'—16 accounts • Murjen—2 accounts • CIBC/Oppenheimer—11 accounts • Paine Webber—21 accounts • Prudential—30 accounts • Solomon Smith Barney—-10 accounts • Trautman Wasserman—67 accounts • Wall Street Discount—12 accounts. (SEC Dem. Ex. 1.) Chester was aware that mutual funds blocked PCM’s trading. On one occasion at TW & Co., PCM wanted to purchase a significant amount of international equity mutual funds. The following morning a good portion of the positions did not get invested because of the market timing police. Christian spoke directly with Chester about this because it was a significant portion of Pentagon’s portfolio, and instead of being invested, they had to sell out of the fund families. Chester was disappointed because the market was up on that particular day. (Tr. 216-17.) TW & Co. negotiated timing capacity primarily with the Janus mutual fund complex. Gregory Trautman (“Trautman”), President and CEO of TW & Co., knew Warren Lammert, one of the earliest portfolio managers at Janus. (Tr. 272-73.) As Christian testified when asked to describe the negotiated capacity: Well, it was—we didn’t have to deal with the market timing police. We were not dealing with kick-outs. The fund was allowing us to trade their funds. They acknowledged who we were and they were allowing us to trade within certain parameters, meaning we couldn’t just trade every day but our traders weren’t typically doing that anyway, so they were openly allowing us to trade, to mark time their funds, despite what a prospectus might state. (Tr. 273.) In a May 3, 2001 email Chester also inquired about using annuities because several other brokers were using annuities and were having success trading mutual funds through annuities because they were not being kicked out of the funds. (SEC Ex. 868; Tr. 298.) On August 30, 2001, Chester sent an email to Trevor Rose (“Rose”), the head of PCM’s Trading & Dealing Desk, and Omid, the Chief Operating Officer of PCM, suggesting that “we start swapping stuff around as we get chucked from funds,” (SEC Ex. 207.) On November 6, 2001 and March 1, 2002, Putnam Investments sent kick out letters to Christian that referenced accounts at TW & Co. that held Putnam mutual funds. (Tr. 285-288; SEC Ex. 243, 236.) On November 28, 2001, Christian sent an email to PCM to advise that the First American mutual fund complex had “hard rejected” trades in seven PCM accounts, meaning that the trades were blocked and the accounts frozen from any further exchanges. (SEC Ex. 233; Tr. 298-301.) Christian sent a similar email on October 26, 2001 concerning different mutual fund complexes, including AIM and Sun America. (Defs. Ex. 159.) Barbara Donegan (“Donegan”) worked at Olympia Capital, the fund administrator for PSPF. Donegan opened accounts for PCM at U.S. broker-dealers only when directed to do so. Donegan took instructions from personnel at PCM to open accounts, not from U.S. broker-dealers. Donegan testified that she was in daily contact with individuals at PCM. Documents that Donegan sent to U.S. broker-dealers indicated that the various LLCs that were on the names of PCM’s accounts were composed of a single member, PSPF. (Barbara Donegan Dep. Tr. 13-14, 19-22, 24-29, 32-111, 131-33; SEC Ex. 680-718.) Christian sent Chester an email on July 1, 2002 indicating that PCM should not trade mutual funds on July 3 or July 5 because the those are low volume days and “on low volume days, it is easier for the funds to track us.” (SEC Ex. 249; Tr. 288-90.) In May 2002, Chester proposed using PSPF share classes C and D interchangeably to trade Janus midcap fund pursuant to TW & Co.’s capacity agreement. (Tr. 291-94; SEC Ex. 686.) On June 7, 2002, Christian sent Chester an email with the subject line “thought you might be interested.” Christian copied a story from a website, entitled “Market Timing Costs Funds $4 billion a Year,” into the body of the email. The story indicated that “the NAVs that international funds (mutual funds holding international equities) calculate at 4:00 p.m. EST are based on securities prices that are half a day old,” and that “[tjimers take advantage of that because they can predict whether the funds’ underlying securities will rise or fall the following day. International markets usually perform the same way U.S. markets did the day before.” (SEC Ex. 624.) On July 30, 2002, Chester sent instructions to at least one broker that “I NEVER want to see the words ‘Market Timing’ on any correspondence, e-mail, telephone call etc. If you want to label what we do with something, call it ‘dynamic asset allocation’, but never market timing!” (SEC Ex. 231.) In one email dated July 30, 2002, Chester wrote that “[w]e can assume a certain level of kickouts, but nevertheless tough to be close to exact.” (SEC Ex. 226.) Similarly, Dr. Profit, head of PCM’s Research and Development Department, ran a trading analysis assuming that PCM suffered from a 25-50% kick out rate. (SEC Ex. 407; Tr. 1708-10.) While Profit testified that he did not conduct a study to reach this rate, his assumption, as PCM’s head of Research and Development, was an educated and knowledgeable estimate. In August 2002 Christian sent fifteen Bank of America account agreements to Donegan for her to open five new accounts for each of PSPF’s classes A, B and C. On August 20, 2002, Chester sent an email to Profit, CC’ing Omid, that states: For our strategy, the following can be said: ... Our return and our models are NOT based on us taking market views, they are based on us taking advantage of mispriced securities (in our case, mutual funds). To pretend any different is stupid. Even Jafar has admitted that the value of us trying to predict positive momentum is a lot less valuable than capturing our edge. (SEC Ex. 59.) On October 4, 2002, Chester had an email exchange with Christian in which Christian indicated that Invesco had “captured,” or frozen, all of Pentagon’s accounts that were trading the Invesco technology fund. (Defs. Ex. 59; Tr. 301-303.) On October 31, 2002, Chester wrote an email about a hedge fund known as “Spire/Tower.” Chester stated that “[h]is ticket sizes have decreased and therefore his number of trades have also increased substantially in recent years—as we would expect for someone trading under the radar screen. And he uses various sub-entities to place the deals—ie., like our LLCs.” (SEC Ex. 209.) On December 27, 2002 Chester sent Christian an email inquiring whether a mutual fund complex had kicked Pentagon out, which Christian understood to be asking whether “we were no longer allowed to trade the fund because we got kicked out by the mutual fund timing police.” (SEC Ex. 250, Tr. 290-91.) On January 15, 2003, Rose asked Donegan to complete a document for CIBC World Markets that provided that all transactions pursuant to the agreement shall be subject to the regulations of all applicable federal, state and self-regulatory agencies, including but not limited to the SEC. (SEC Ex. 698.) On March 19, 2003, Tran sent an email to Donegan asking that when she received paperwork to open Pentagon accounts at Prudential Securities in New York, she “play around with the name” on the accounts “so instead of Pentagon Management Partners can you call it Management Partners and on the second line write C/o PSP I’ve found out by change the format this confuses the Fund Company and they’re unable to detect who we are for a good few months.” (SEC Ex. 703.) Tran also wrote in a March 19, 2003 email that he had forwarded to Donegan account opening forms to open five accounts with Wall Street Discount, and that Donegan should “mark the first line c/o Olympia, and then the second line as normal.” (SEC Ex. 703.) Two PCM internal emails refer to under the radar trading as “Stealth Trading” in the context of PCM’s research into the practices of other market timers. On July 9, 2003, Matthew Ember (“Ember”), a trader at PCM, sent an email to Chester, Anthony Profit (“Profit”), head of the .PCM Research and Development Department, and Omid describing a conversation he had with a hedge fund known as “Axiom.” Under the heading “Stealth/distribution,” Ember wrote: Use many small tickets (a couple of hundred k) Understand ‘hot spots’ for fund companies, often by explicitly asking them(!)—result is low kickout rate of 2-3% (same as before) Have about 12 clearers/platforms—same as before—nothing has tightened / no problems in this area. (SEC Ex. 210.) On July 31, 2003, Ember sent an email to Directors and Research & Development entitled “Quick summary: US ‘bottom feeders’ doing pure long-only International under the radar,” which described a hedge fund known as “Blackpoint,” to which Chester directed investments on behalf of the fund-of-funds, Talisman. (SEC Ex. 217.) Under the heading “Stealth,” Ember described Blackpoint’s trading as “[j]ust small ticket sizes, trial and error, etc. (didn’t mention anything original that we’ve heard elsewhere, like phoning up the fund companies and asking them).” (Id.) The same day, Chester replied to Embler’s email, saying “obviously, after each of these, put them on the file.” (Id.) On August 5, 2003, Chester received a memorandum discussing market timing hedge funds from a European banker. Chester’s response was “[n]ote: no mention of Pentagon anywhere. This means either one of two things: i) we really are well below the radar screen, which is good news (!) or ii) he’s not as knowledgeable about the sector as he professes (!!).” (SEC Ex. 203). On August 22, 2003, Ember sent an email to Chester, Omid, and Research & Development describing a conversation with the hedge fund NettFund. Ember wrote “Entirely international, small tickets, under the radar (average $250k tickets, means about 250 trades on a full go in day), lots of different entities, etc.” (SEC Ex. 199.) The Defendants were aware that their trades had been rejected or that they were kicked out of the Oppenheimer Funds, Ivy Funds, Goldman Sachs Funds, Sentinel Funds, Federated Funds, Van Kampen Funds, First American Funds, Pilgrim Funds, ING Funds, Putnam Asia Pacific Growth Funds, Putnam Europe Equity Funds, Evergreen Funds, Seligman Funds and Defendants continued trading in these funds after these “kick outs.” (SEC Ex. 256, SEC Dem. Ex. 11 (Oppenheimer); SEC Exs. 642-46, Tr. 1252, SEC Dem. Ex. 28(Ivy); SEC Exs. 858 & 867, SEC Dem. Ex. 30 (Goldman); SEC Ex. 282, SEC Dem. Ex. 15 (Sentinel); SEC Ex. 373, SEC Dem Ex. 26 & 27 (Federated); SEC 233, SEC Dem. Ex. 9 (First American); SEC Ex. 108, SEC Dem. Ex. 5 (Pilgrim); SEC 748, SEC Dem. Ex. 18(ING); SEC Ex. 291, SEC Dem. Ex. 20 (Putnam); SEC Ex. 343 & 748, SEC Dem. Ex. 22 (Evergreen); SEC Ex. 345, SEC Dem. Ex. 23 (Seligman).) Defendants were further aware that they were kicked out of the AIM funds for market timing. (SEC Ex. 234, 677, 678, 679, 839, 840, 841, 842.) SEC witness Samuel Engelson (“Engelson”) reviewed TW & Co.’s files and assembled various documents demonstrating both PCM’s cloning of accounts to continue trading U.S. mutual funds following kick outs. (Tr. 181-205, 1136-1156, 1755-1760; SEC Ex. 839, 840, 841, 842, 858, 859, 860, 861, 863, 864, 865, 866, 867.) Between 1999 and 2003, PCM placed a total of 44,488 mutual fund transactions through thirteen U.S. broker-dealers. (SEC Ex. 420, App. 3.) These transactions totaled over $14 billion. (Id., Ex. 4.) PCM had an average holding period of three days, and a median holding period of two days. (Id. Ex. 5). Of these transactions, 22,448 were buys totaling over $7,128,391,744 (over $7.1 billion) and 22,038 were sells/redemption totaling $7,178,636,179 (nearly $7.2 billion). (Id., Ex. 4). The Defendants participated in market timing under the radar with knowledge that certain of the mutual funds sought to eliminate the practice. G. Late Trading By PCM On March 30, 1999, Chester emailed three PCM employees as follows: On the assumption that we will be investing an initial $2m with Morgan Stanley for onward investment in Templeton, the following dealing arrangements have been agreed:- You will need to contact Graves Kieley by phone (follow up fax) 5 mins before Templeton’s dealing cutoff time (which I believe is 9pm). Graves will then place the deal. Best thing to do is contact Graves directly and talk through the exact procedure with him to ensure no cock-ups.... Make sure you have 2 other people to contact and 2 fax numbers, and