The NASD has fined Paul Saunders, chairman and CEO of hedge fund James River Capital, $2.25 million for market timing mutual funds through annuities.
The fine includes disgorgement of $750,000 in illicit profits and a 60-day suspension from the industry. The NASD is also investigating the brokers who assisted Saunders.
The self-regulatory organization said this is the largest fine it has imposed on an individual to date for market timing. Previously, the NASD has fined 16 individuals between $100,000 and $375,000 each for market timing.
“Deceptive market timing designed to exceed prospectus limitations and evade insurance company and mutual fund restrictions not only violates ethical standards but may also harm investors,” said NASD Executive Vice President and Head of Enforcement James S. Shorris. “The enforcement action announced today makes clear that brokers, including those who operate as hedge fund managers, will be held accountable for this kind of misconduct and will be required to disgorge their profits and pay a substantial penalty.”
The NASD said that while James River Capital’s Jazzman Fund was designed specifically to market time, Saunders created 19 limited partnerships with different names and tax identification codes under Jazzman to appear as separate entities and conduct nearly 1,000 deceptive trades between October 2001 and September 2003. All of the annuitants in the partnerships were actually employees of companies that Saunders controlled. At one broker/dealer, the NASD said, Saunders created 20 different accounts for the partnerships.