NASD announced today that it has charged two Utah brokers, Jeffrey Doerr and David Corn, with facilitating a hedge fund manager's deceptive practices to market time through variable annuities offered by three different life insurance companies. Both Doerr and Corn were registered with Prudential Securities, Inc. (PSI) - now known as Prudential Equity Group - but have since left the firm. NASD also charged the brokers' branch manager, Darrel Trost, with failing to supervise their activities.
"Deceptive market timing violates ethical standards and can harm long-term investors in mutual funds and variable annuities," said James S. Shorris, NASD Executive Vice President and Head of Enforcement. "Brokers who actively facilitate the deceptive market timing conduct of their customers will be held accountable for this kind of misconduct."
In its complaint, NASD alleges that Doerr and Corn actively facilitated market timing activities by their customer - Paul Saunders, a hedge fund manager, registered broker and Chairman, CEO and majority owner of James River Capital Corporation of Richmond, VA. NASD fined Saunders $2.25 million in October 2006 - the largest sanction ever against an individual for deceptive market timing.
NASD alleges that Doerr and Corn assisted Saunders by opening 20 brokerage accounts at PSI for him between 2000 and 2003, in the names of numerous limited partnerships he created that had the same beneficial owners as his market-timing hedge fund. NASD alleges that Doerr and Corn knew or should have known that Saunders would use these accounts to market time variable annuities and that the limited partnerships shared the same beneficial owners.
NASD' further alleges that, with Doerr and Corn's assistance, Saunders executed approximately 900 variable annuity sub-account exchanges between October 2001 and September 2003 that violated insurance company restrictions or limitations, earning approximately $5.2 million in profits. Doerr and Corn each made approximately $45,000 in commissions from this activity.
In its complaint, NASD alleges that after Saunders began market timing sub-accounts through Doerr and Corn, the brokers received notices from insurance companies attempting to restrict or block Saunders from further market timing. The complaint alleges that after receiving the restriction notices, Doerr and Corn assisted Saunders in evading the insurance company restrictions by engaging in the following deceptive practices, separately or together:
- Opening multiple contracts for Saunders in a variable annuity, in the names of different related limited partnerships, and simultaneously entering trades for Saunders in those annuity contracts;
- Handling Saunders's purchase of new contracts in a variable annuity in the names of other limited partnerships that shared the same beneficial owners as the partnerships that had been restricted or blocked by insurance companies;
- Handling Saunders's purchase of new contracts in the same variable annuity, with Saunders identifying a different annuitant. The brokers knew or should have known that all the annuitants used by Saunders were employees of entities Saunders controlled;
- Submitting applications for Saunders in much smaller dollar amounts after certain insurance companies rejected an annuity contract because it was purchased with a large initial investment.
The complaint alleges that Doerr and Corn used four separate broker identification numbers to help Saunders evade efforts by insurance companies to restrict his market timing activities. After one annuity contract opened with one number was restricted, the brokers would open a new contract with a different number.
NASD also charged Trost with failing to supervise Doerr and Corn. Trost knew or should have known that Saunders opened accounts for limited partnerships that shared common ownership, and that Saunders was engaging in prohibited market timing. He reviewed notices from insurance companies restricting Saunders's market timing, but did not restrict the accounts from continuing that activity. The complaint further alleges that Trost failed to adequately respond to repeated requests by PSI's Compliance Department regarding Saunders' market-timing activities.
NASD also alleges that Doerr, Corn and Trost also separately failed to update each of their Forms U4 for over seven months — and then only at the prompting of NASD staff — to reflect that each was the subject of an investigation that could result in a disciplinary proceeding.
The complaint announced today follows related NASD actions not just against Saunders, but against PSI. On Aug. 28, 2006, NASD, federal and state securities regulators and the Department of Justice announced settlements and $600 million in monetary sanctions against PSI for misconduct involving improper market timing of mutual funds.
Under NASD rules, a firm or individual named in a complaint can file a response and request a hearing before an NASD disciplinary panel. Possible remedies include a fine, censure, suspension or bar from the securities industry, disgorgement of gains associated with the violations, and payment of restitution.
The issuance of a disciplinary complaint represents the initiation of a formal proceeding by NASD in which findings as to the allegations in the complaint have not been made and does not represent a decision as to any of the allegations contained in the complaint. Because this complaint is unadjudicated, interested persons may wish to contact the respondent before drawing any conclusions regarding the allegations in the complaint.
Investors can obtain more information about, and the disciplinary record of, any NASD-registered broker or brokerage firm by using NASD's BrokerCheck. NASD makes BrokerCheck available at no charge. In 2006, members of the public used this service to conduct more than 4.7 million searches for existing brokers or firms and requested more than 207,000 reports in cases where disclosable information existed on a broker or firm. Investors can link directly to BrokerCheck at www.nasdbrokercheck.com. Investors can also access this service by calling (800) 289-9999.
NASD is the leading private-sector provider of financial regulatory services, dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business-from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and registered firms. For more information, please visit our Web site at www.nasd.com.
("Copyright 2007 National Association of Securities Dealers, Inc.")
