Hedge fund manager Paul Saunders, chairman and CEO and majority owner of James River Capital Corporation, was sanctioned $2.25 million – the largest fine ever imposed by NASD – for allegedly engaging in market timing practices.
Saunders was suspended for 60 days, and an investigation has been launched into the activities of brokers who helped him.
“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,” says James S. Shorris, executive vice president and head of enforcement at NASD. “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, a partner and trading manager of the Jazzman Fund hedge fund, was established to engage in market timing. Through JRCC, Saunders created 19 limited partnerships under Jazzman in order to increase the hedge fund’s ability to market time mutual fund sub-accounts of changeable annuities.
Though Jazzman’s partnerships have separate names and tax identifications, Saunders did not tell the insurance companies that the partnerships had common owners. NASD determined that from October 2001 to September 2003 Saunders mislead insurance companies so they wouldn’t restrict his market timing in sub-accounts of variable annuities.
“Saunders opened 20 different accounts for the Jazzman partnerships at one broker-dealer and commenced market timing through variable annuity sub- accounts, sometimes simultaneously purchasing contracts and trading in the same annuity through several Jazzman partnerships,” says a NASD spokesman. “After receiving communications from insurance companies restricting further market timing, the Jazzman hedge fund, under Saunders’ direction, used three deceptive practices to continue market timing.”
Saunders illegal practices allowed Jazzman to partake in 1,000 variable annuity transactions, surpassing the insurance company limit for a singly entity.
Though Saunders did not admit or deny the allegations, he approved of NASD’s findings.