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"The enforcement action announced today, and similar cases we have brought in recent months, make clear that NASD expects firms to have enhanced procedures, systems and practices to ensure that illicit market-timing activities like these do not occur," said NASD Vice Chairman Mary Schapiro.
H&R Block recruited and hired the two brokers in September 2002 knowing the brokers were going to open accounts for hedge funds that intended to rapidly trade in and out of funds that discouraged such behavior, according to the settlement. The hedge fund customers were charged a flat 1% fee, higher than what was customary for fee-based accounts similar in size. The inflated fees were a kickback for the ability to market time funds.
Despite receiving 44 restriction letters from fund companies for its market-timing activity, H&R Block allowed the hedge funds to use linked accounts and open new accounts in other cities in order to continue timing the funds. The customer executed 64 inappropriate transactions that generated $325,000 in returns.
An investigation into the brokers who orchestrated the scheme is continuing, NASD said.