SEC must cut fine against British fund over abusive trades: U.S. court Thu Aug 8, 2013 11:46am EDT (Reuters) - A British hedge fund firm and its chief executive must give up $38.4 million of profit tied to abusive mutual fund trading, but a civil fine in that amount must be reduced, in a case brought by the U.S. Securities and Exchange Commission, a federal appeals court said on Thursday. The decision by the 2nd U.S. Circuit Court of Appeals involving Pentagon Capital Management Plc and its chief Lewis Chester is among the last tied to an industrywide probe into market timing and "late trading" in funds, unveiled a decade ago by then-New York Attorney General Eliot Spitzer. Market timing involves rapid trading in violation of funds' rules and at ordinary investors' expense, and is considered improper. Late trading involves the trading of fund shares after the market closes but at old prices, and is considered illegal. Pentagon and Chester had been accused of late trading from roughly June 1999 to September 2003, and U.S. District Judge Robert Sweet in Manhattan found them liable in a non-jury trial. In their appeal, the defendants did not deny engaging in the practice, but claimed there was no deceit, and that as investment advisers rather than brokers they could not be held primarily liable for securities fraud. A three-judge panel of the 2nd Circuit disagreed. Calling deceitful intent "inherent" in late trading, Circuit Judge John Walker said the defendants sought out brokers to conduct late trading, and knew that trade sheets would be time-stamped before 4 p.m. though they had no intention to trade before then. The appeals court said the fine must be recalculated, and not take into account profit earned through late trading more than five years before the April 2008 SEC lawsuit. It cited an intervening February ruling by the U.S. Supreme Court, in SEC v Gabelli, that said a five-year period for the regulator to seek civil penalties for fraud begins when the fraud ends, not when it is discovered. The 2nd Circuit also said Sweet erred in holding Pentagon and Chester could each be held fully responsible for a fine. A lawyer for Pentagon and Chester was not immediately available for comment. The SEC had no immediate comment. Pentagon once oversaw more than $2 billion of assets, but began closing its funds shortly before the SEC sued. Spitzer has also served as New York's governor and is now a candidate to become New York City's comptroller. The case is SEC v. Pentagon Capital Management Plc et al, 2nd U.S. Circuit Court of Appeals, No. Reporting by Jonathan Stempel in New York; editing by Andrew Hay