The NASD announced Monday it has fined Janney Montgomery Scott $1.2 million for permitting improper market timing and related violations. In addition, the NASD ordered the Janney to pay nearly $1 million in restitution to the affected mutual funds.
The NASD has also suspended Kenneth Rosato, Janney's former Brooklyn branch manager who permitted the misconduct, for one year and fined him $370,000, which includes the $185,000 in commissions he reaped through the prohibited activity.
The NASD charged that from May 2000 through September 2003, Rosato, with Janney's knowledge, permitted two hedge fund customers to evade nearly 200 attempts by mutual fund companies to block or restrict their market timing transactions, by opening up 19 different accounts for the customers through which they made 1,600 trades.
"Rosato also suggested deceptive strategies the hedge funds could use to evade attempts by mutual funds to restrict market timing," according to the NASD, "such as waiting a certain number of days after the initial purchase before market timing, limiting exchanges to a certain number per month, keeping transactions under a certain dollar amount and recommending certain mutual funds to market time because those funds' market-timing monitoring efforts were viewed as being ineffective."
The NASD found that Janney Montgomery Scott was fully aware of the market timing, as the mutual funds affected had sent numerous complaints to the firm about the transgressions. But because the firm also had an inadequate supervisory system, it inaccurately responded to an NASD inquiry in October 2003 about market timing, telling the regulator such activity was not taking place.