On February 15, the NASD announced that it was charging two former prudential brokers with helping a hedge fund manager to time the market through variable annuities. The former broker’s supervisor was also charged with failure to properly supervise them. Both brokers were registered with Prudential Securities Inc., now called Prudential Equity Group, during this time.
David Corn and Jeffrey Doerr allegedly helped Paul Saunders, a client, by opening 20 accounts for him under the names of a number of limited partnerships that had been created by Saunders. The limited partnerships had the same beneficial owners as James River Capital Corp., which was Saunders’s market timing hedge fund. The NASD says that the two brokers should have known their client would use the accounts for the purpose of market timing variable annuities and that the limited partnership had the same beneficial owners.
The SRO says that, between October 2001 and September 2003, Saunders executed about 900 variable annuity sub-account transactions with the brokers’ help. These transactions earned about $5.2 million, while violating the restrictions set up by insurance companies that offered annuities. The two brokers made about $45,000 each from these trades and their commissions.
The NASD says that insurance companies sent notices to Corn and Doerr asking them to restrict their clients market timing activities. The SRO claims that the two men used several deceptive practices to help Saunders evade these restrictions. The NASD says that Darrel Trost, the brokers’ manager, should have been aware of these activities. Trost is accused of failing to respond to the insurance companies and Prudential’s compliance department. The NASD also says that seven months went by where the three men did not update forms to indicate they were being investigated.
Last August, Prudential Equity Group reached a deferred prosecution agreement with the Department of Justice. The Group admitted to criminal wrongdoing related to market timing and, in a global settlement involving seven regulators, agreed to pay $600 million.
Saunders agreed to pay $2.5 million to settle NASD charges against him related to the alleged market timing activity.
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