National Securities Corp., a Seattle brokerage firm, has agreed to a one-month ban on opening mutual fund accounts and must pay $600,000 in fines and restitution to settle allegations that its employees helped hedge funds engage in predatory short-term trading in mutual funds.
Securities industry regulator NASD imposed this first-of-its-kind ban as part of a new effort to make punishments more closely related to misbehavior, officials there said. "This is really an example of tailoring the sanction to the particular violation. It really gives meaning to the problem . . . as opposed to going with a straight fine," said James S. Shorris, NASD deputy chief of enforcement.
In recent months, NASD, formerly known as the National Association of Securities Dealers, has expanded its range of sanctions. As the main private regulator for securities firms, it barred investment giant Morgan Stanley from registering new brokers for a week as punishment for allegedly failing to report customer complaints and disciplinary actions against employees in a timely manner.
Similarly, a former Salomon Smith Barney research analyst who had allegedly issued misleading research to help the firm's investment banking clients was suspended for six months and barred from issuing new research reports for an additional 18 months.
In the case of National Securities, NASD said, between January 2001 and August 2002, three brokers in the firm's New York office helped four hedge funds evade mutual fund company rules against market timing, a kind of short-term trading that seeks to exploit differences between a fund's daily price and the value of its assets. The brokers helped hedge funds, lightly regulated funds that manage pools of capital solicited from wealthy individuals and institutions, place more than 1,000 short-term mutual fund trades totaling $400 million, netting the clients nearly $300,000 in profit at the expense of longer-term investors.
The entire securities industry has been roiled by the market timing issues since September, when New York Attorney General Eliot L. Spitzer revealed that brokers and mutual fund companies were cutting secret deals that allowed hedge funds to engage in market timing. NASD has now brought eight cases against brokers and distributors, while Spitzer and the Securities and Exchange Commission have extracted nearly $3 billion in fines, restitution and promises of lower fees from the mutual fund companies.
In this case, National Securities' top officers also were held personally responsible for allegedly ignoring "red flags" in the form of e-mails from the mutual fund companies complaining about the rapid trades. The firm's president, Michael A. Bresner, was fined $25,000 and suspended for one month as a supervisor, and the company's former chief operating officer David M. Williams also was fined $25,000 and received a four-month supervisory suspension.
The firm's attorney Adam D. Cole, a partner at Greenberg Traurig LLP, said, "National, as part of its agreement with the NASD, does not admit or deny the allegations. National is pleased with the ability to move forward and have this mutual fund issue behind them."
He said customers of the firm's 70 offices who already have mutual fund accounts can continue to make trades. The suspension starts Sept. 20.