Cooked Books:
Philip Bennett, former CEO of Refco Inc., the largest independent commodities and futures exchange, was arrested on securities fraud charges in October. It is alleged that a firm Bennett controlled owed Refco as much as $545 million. Refco has since said earnings reports dating back to 2002 are unreliable. Refco Securities, the broker/dealer unit that accounts for more than half of the firm's gross revenues, has stopped taking new clients and is “unwinding” current ones. Refco's prime brokerage arm, Refco Capital Markets, has also frozen all activity. The firm has hired Goldman Sachs as a financial advisor and former SEC Chairman Arthur Levitt as a special advisor.
Direct Violation:
The NASD enforcement division's sweep of directed-brokerage violators resulted in total fines of more than $7.75 million for seven retail b/ds and one mutual fund distributor in October. In exchange for benefits like higher visibility on firms' internal Web sites, increased access to firms' sales forces and participation in “top producer” meetings, mutual fund firms directed trades from the portfolios they managed to the b/ds. “NASD's prohibition on directed brokerage is designed to eliminate these conflicts of interest,” says Barry Goldsmith, NASD vice president and head of enforcement. The NASD's anti-reciprocal rule prohibits a firm from recommending funds or establishing preferred lists of funds in exchange for receipt of directed brokerage.
Busted Market Timers:
The NASD nailed two b/ds and one fund distributor for separate market-timing violations.
ING Funds Distributor (IFD), the wholesale distributor of ING mutual funds, was handed a $1.5 million fine — the largest ever imposed by the NASD in a market-timing case — and was ordered to pay $1.4 million in restitution. In separate actions, the NASD also fined Philadelphia-based b/d Janney Montgomery Scott $1.2 million and San Diego-based First Allied Securities $408,000.
In the IFD case, it was found that two registered reps and one investment advisor were allowed to continue market-timing activities in the firm's Pilgrim Funds despite language in the prospectus prohibiting such activity. IFD supervisor William Sessions was fined $25,000 and suspended for 30 days for failing to detect and prevent the activity.
In the Janney case, the firm was found to have been aware of the timing activities of a former Brooklyn-based Janney broker, Kenneth Rosato, who earned himself $1 million at the expense of fund shareholders by helping two hedge fund customers market time between 2000 and 2003. First Allied was fined for facilitating the deceptive market-timing arrangements of Gary Ferraro, a former First Allied broker in Chicago. He was fined $136,700.