October 29, 2006
Hedge Fund CEO Fined $2.25 Million
I have spoken time and again about regulations and how they may not be all that good for the industry. Recent events seem to have reinforced my views. External regulation may definitely not work in this industry. One reason is that hedge fund managers prefer to keep their dealings to themselves and generally don’t like external meddling.
But what if someone from within the fraternity committed a fraud, which caused loss of money to the public? You know what is the worst part about a fraud of any kind – innocent investors losing a great deal of money and something more important, their faith in the system. Probably someone from within the industry should play police? Now that’s something I welcome wholeheartedly.
What am I coming to? The recent imposition of $2.25 million fine by securities regulators on Paul Saunders, the chairman and CEO of hedge fund James River Capital Corp. Reason: He allegedly used deceptive practices in trading in the long-term investments known as variable annuities.
The National Association of Securities Dealers, the brokerage industry’s self-policing organization, imposed this civil penalty. The over $2 million penalty is supposed to be the largest fine ever imposed on an individual. It includes restitution of some $750,000 in illicit profits that Saunders allegedly personally made.
Mr. Saunders is alleged of conducting improper market timing -- frequent "in-and-out" trading. He will also be suspended for 60 days from working as a broker. As of now, Saunders has neither admitted nor denied the NASD's allegations. Market timing is not officially illegal. However, it is widely restricted because it tends to skim profits from other shareholders.
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