The National Association of Securities Dealers today announced that it has fined a hedge fund manager US$2.25 million for deceptive market timing in variable annuities.

The regulator reported that the fine is its largest ever imposed against an individual for market timing. Hedge fund manager, Paul Saunders, is a registered broker and is chairman, CEO and majority owner of James River Capital Corp. The fine, for using deceptive practices to market time through variable annuities, includes disgorgement of approximately US$750,000 in illicit profits. NASD also suspended Saunders for 60 days.

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

The NASD found that from October 2001 through September 2003, Saunders used limited 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.

It says that Saunders opened 20 different accounts for the 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 partnerships. 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.

These practices enabled the fund to execute approximately 1,000 variable annuity transactions, well in excess of insurance company limits for any single entity. Saunders personally made approximately US$750,000 in illicit profits from the deceptive conduct, it said.

The NASD says that its investigation into the activities of the brokers who assisted Saunders’ market timing is continuing.

“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 James Shorris, executive vice president and head of enforcement. “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 has previously sanctioned 16 individual brokers, supervisors and principals for impermissible market timing, imposing fines ranging from US$10,000 to US$375,000 and suspensions ranging from 23 days to one year. Contested charges are pending against four other individuals.