NASD Imposes Record Market Timing Fine On Hedge Fund Manager

by Glen Shapiro, LawAndTax-News.com, New York

27 October 2006

The National Association of Securities Dealers announced on Wednesday that it has imposed its largest fine ever on an individual for market timing - a $2.25 million sanction against hedge fund manager Paul Saunders, a registered broker who is Chairman, CEO and majority owner of James River Capital Corporation (JRCC) of Richmond, VA.

The fine, for using deceptive practices to market-time through variable annuities, included disgorgement of approximately $750,000 in illicit profits. NASD also suspended Saunders for 60 days.

An NASD investigation into the activities of the brokers who assisted Saunders' market timing is ongoing.

"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," explained James S. Shorris, Executive Vice President and Head of Enforcement.

He continued:

"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."

JRCC is general partner and trading manager of the Jazzman Fund, a hedge fund established specifically to engage in market timing. After personally investing in Jazzman, Saunders, through JRCC, created 19 limited partnerships under Jazzman to increase the hedge fund's ability to market-time mutual fund sub-accounts of variable annuities.

While each Jazzman partnership appeared to be a separate entity, with a different name and tax identification number, the partnerships all had common owners - a fact that Saunders did not disclose to insurance companies that offered the variable annuities.

NASD found that from October 2001 through September 2003, Saunders used these Jazzman partnerships to engage in numerous deceptive practices to evade attempts by insurance companies to block or restrict his market timing in sub-accounts of variable annuities.

In settling with NASD, Saunders neither admitted nor denied the allegations, but consented to the entry of NASD's findings.

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