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CIBC director arrested

Date: Wednesday, February 4, 2004

A former executive at Canadian Imperial Bank of Commerce was arrested yesterday and faces charges from both New York state and federal authorities for helping various hedge funds gain financing to make illegal mutual fund trades. Paul Flynn, until recently a managing director at CIBC's New York office, was charged with stealing $1m from mutual funds by helping to organise illegal late trading in fund shares, said Eliot Spitzer, New York's Attorney general. He also faces civil charges from the Securities and Exchange Commission for helping hedge funds carry out improper mutual fund trades. It is alleged that CIBC lent $1bn to hedge funds which were involved in illegal and improper trading of fund shares. Mr Flynn, 46, who left the bank in December, could face up to 25 years in jail if he is found guilty of the five felonies he is charged with. The SEC said: "Mr Flynn knew or was reckless in not knowing that the hedge funds were engaging in late trading and deceptive market timing of mutual funds." More than 20 companies are under investigation by regulators for improper or illegal fund trading in what has become the biggest scandal in 60 years for the $7,200bn funds industry. The scandal has extended to fund management companies, hedge funds and brokers who handled the trades. Along with other firms, CIBC is believed to be in talks with regulators to attempt to reach a settlement over its role. Several other executives have left CIBC since the probe began. Robert Deutsch, the head of arbitrage and derivatives, left the New York office just days ago and has been contacted by regulators. Two others left the bank at the same time as Mr Flynn. This represents the second bout of bad news for CIBC. Only two weeks ago, the bank, which has been trying for several years to push into the US market, paid $80m to settle with regulators for helping Enron inflate its earnings by $1bn over three years. CIBC reported its highest-ever profit last year, of C$2bn (US$1.49bn), and its shares doubled to $54 from a low of $21 in November 2002. They have fallen to $51 in recent days as news of the probe leaked out. John Hunkin, CIBC's chief executive, received an 800 per cent rise in salary and bonuses, to C$7.5m for the year, on the strength of the bank's performance. The bank's push into the US has been responsible for some big losses. CIBC bought Oppenheimer & Co in 1997, for $525m, and sold it in 2002 for less than half that. Conrad Black, former chief executive of Hollinger who is also under investigation by regulators, was a director at CIBC for 26 years and just two weeks ago said he had decided not to stand for re-election.