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NASD Fines Three Brokers $3.1M for Market Timing


The NASD last week fined three brokerage firms a total of $3.1 million for permitting improper market timing and ordered them to repay the affected mutual funds $2.7 million in restitution. All three firms, Janney Montgomery Scott, ING Funds Distributor and First Allied Securities, accepted the penalties without admitting or denying the charges.

NASD fined Janney $1.2 million and imposed restitution of nearly $1 million. ING was hit with a $1.5 million fine and ordered to repay $1.4 million, and First Allied was penalized with a fine of $408,000 and ordered to repay $326,500.

The NASD also suspended Kenneth Rosato, Janney's former Brooklyn branch manager who permitted the misconduct, for one year and fined him $370,000, which includes the $185,000 in commissions he reaped through the prohibited activity. The NASD charged that from May 2000 through September 2003, Rosato, with Janney's knowledge, permitted two hedge fund customers to evade nearly 200 attempts by mutual fund companies to block or restrict market timing by opening up 19 different accounts for the hedge funds, through which they made 1,600 trades. The NASD also found that because the firm had an inadequate supervisory system, it inaccurately responded to an NASD inquiry in October 2003 about the market timing, telling the regulator such activity was not taking place.

At ING, which has been hit with the NASD's largest fine to date in a market-timing case, the regulator uncovered written agreements that allowed three customers to market time funds. William Sessions, the ING sales representative who allowed the malfeasance to occur, was fined $25,000 and suspended for 30 days. This is the second time in just a few months that ING has had to deal with regulators. The firm recently settled allegations with the Securities and Exchange Commission for reselling $202 million worth of company securities without registering them first.

The NASD charged First Allied with allowing and assisting three hedge fund customers to take part in market-timing transactions. The NASD also fined Gary Ferrarro, the First Allied broker for the three customers, $136,000 and suspended him for nine months. Ferrarro allegedly approved sticky-asset deals with two mutual fund investment advisors in exchange for allowing the hedge funds to market time several of their funds, despite rules against this in the funds' prospectuses. The NASD found that before First Allied hired Ferrarro, the company knew that his customers were involved in market timing.

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