The allegations mark the first time that regulators have addressed the illegal conduct of so-called intermediaries in the $7 trillion mutual fund industry. ``Pervasive misconduct must be met with appropriate sanctions,'' Spitzer said in a statement.

Executives at some of the industry's biggest mutual fund companies including Alliance Capital Management Holding LP and Putnam Investments have been ousted in the trading scandal. Spitzer has filed criminal charges against a former Bank of America Corp. broker, a former trader at Millennium Partners LP and the former vice chairman of Fred Alger Asset Management Inc.

Larceny

Seeger, the 41-year-old founder and former chief executive of Security Trust, along with Kenyon, 57, and McDermott, 34, may serve as much as 25 years in prison if convicted on the most serious counts of grand larceny, regulators said. The defendants' actions led to larceny of more than $1 million, Spitzer said.

Frederick Hafetz, Seeger's lawyer, said his client's conduct wasn't criminal. ``He did nothing illegal,'' he said in an interview. ``We're confident he'll be vindicated in court.''

McDermott's lawyer, Don Martin, said his client was first to complain about the activities being challenged by regulators to her boss and to Security Trust's board. ``It's extremely regrettable and disappointing that they have chosen to charge her,'' Martin said from his office in Phoenix.

Gerald Shargel, a lawyer for Kenyon, said his client would plead not guilty and contest the charges.

The three former executives appeared in New York state criminal court for their arraignments on Tuesday afternoon. Seeger and Kenyon will be released after each posting a $1 million bond and McDermott after posting a $500,000 bond.

Security Trust, which employs more than 100 people, said it would work with regulators to dissolve the company by March 31. The business of the company's clients will be transferred to an unidentified entity, Chief Executive Officer Thomas Plumb said in a statement.

SEC Complaint

A civil complaint from the Securities and Exchange Commission alleged that Security Trust facilitated hundreds of after-hours trades in almost 400 mutual funds from May 2000 until July to the detriment of long-term investors. Seeger and McDermott, the former senior vice president of corporate services, ``repeatedly misrepresented to mutual funds that the hedge funds were a retirement plan account,'' the SEC said.

Among the mutual funds that hedge fund Canary Capital Partners LLC illegally traded for profits of at least $1 million each were the Legg Mason Value Trust, the MFS Emerging Growth Fund and the Artisan International Fund, according to Spitzer's complaint. The Legg Mason fund, managed by Bill Miller, has outperformed the Standard & Poor's 500 Index for a record 12 straight years.

Security Trust, which had an agreement under which Canary paid it 4 percent of its profits above a certain threshold, received about $5.8 million from the fraudulent trading, the SEC said in a statement. Canary made over $85 million, the SEC said.

Late Trading

Spitzer alleged on Sept. 3 that Security Trust helped Canary, which is based in New Jersey, make illegal mutual fund trades after stock markets closed at 4 p.m. New York time. Mutual funds are priced once a day, and all trades are due by 4 p.m. to get that day's closing price. Orders submitted later are supposed to get the following day's price to prevent any investors from taking advantage of late-breaking news.

To give intermediaries such as Security Trust time to pool orders, fund companies often let them submit trades after the close of U.S. markets. Spitzer alleged in his September complaint against Canary that Security Trust allowed the hedge fund to slip in trades until 9 p.m.

Regulators probably will have more cases against intermediaries as the review of trading abuses continues because a lack of regulation may have led to violations at other firms, said Philip Newman, who advises mutual fund companies and fund boards as head of the investment management practice at the law firm Goodwin Procter LLP in Boston.

`Real Problem'

``The real problem that's being exposed here is that all these different intermediaries need to be subject to a single set of rules and regulations for oversight of the industry to be effective,'' Newman said.

On Nov. 21, Spitzer said some companies would disappear as a result of his probe. ``There will be entities that will no longer exist when we are done,'' he said.

Last week Spitzer and the SEC filed a civil complaint against Gary Pilgrim and Harold Baxter for allowing short-term trading of their company's funds. Allegations also have been leveled against former employees of Putnam Investments and Prudential Securities Inc., as well as Bank of America and Alger Asset Management.

Cooperation

Today's filings by Spitzer, the OCC and the SEC marks the broadest cooperation between state regulators and their federal counterparts in the mutual fund investigation. Spitzer criticized the SEC two weeks ago for settling civil fraud charges against Boston-based Putnam without consulting him.

Stephen Cutler, director of the SEC's enforcement division, said the case against Security Trust was the result of ``effective cooperation by federal and state agencies alike.''

Seeger's company was cited three times in the 1990s by Arizona bank regulators for violating its fiduciary duties to clients and investing customers' money in risky ventures that the firm had a stake in. Seeger was personally cited in a 1998 cease- and-desist order from the banking department for misleading regulators.

Seeger, who grew up in Grand Forks, North Dakota, graduated from Arizona State University in 1984. With a classmate, he started a financial consulting business in 1987. Four years later, they formed Security Trust.

On Oct. 30, Security Trust said it fired 30 people, including a half dozen who worked with Canary. Kenyon, Security Trust's former president, was among those ousted.