Davenport & Co., a Richmond, Va.-based brokerage firm, market timed variable annuity sub-accounts on behalf of two of its hedge fund clients, the National Association of Securities Dealers charged Tuesday, ordering Davenport to pay $450,000 for improper trading.
The NASD fine includes an order for Davenport to pay $228,000 in restitution to variable annuity shareholders who suffered as a result of the firms rapid-fire trading. The fine also cites Davenport for failing to establish an adequate supervisory system and its inability to document a policy aimed at preventing late trading of mutual funds.
"Deceptive market timing in variable annuity sub-accounts can dilute the value of those shares, raise transaction costs and thus harm other annuity investors," said NASD Vice Chairman Mary L. Schapiro "This is an improper and objectionable trading practice that rises to a higher level of abuse when the firm not only knows that its clients intend to deceive the variable annuity companies, but is complicit in carrying out that deception."
Brokers at Davenport in each case knew that each variable annuities prospectuses banned rapid-fire trading by professional market timers. The Davenport brokers, according to the NASD, continued to make prohibited trades after Western Reserve Life, the variable annuity provider, issued a cease and desist warning.