Compliance November 29, 2007

FINRA Fines Rafferty for Violations Related to Late Trading and Market-Timing

The Financial Industry Regulatory Authority (FINRA) has sanctioned Rafferty Capital Markets, LLC, of Garden City, New York, for facilitating improper market-timing practices and for failing to have an adequate supervisory system to prevent deceptive market timing and late trading, among other violations.
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According to an announcement, FINRA ordered Rafferty to refrain from opening new mutual fund brokerage accounts for any new or existing customers for 90 days. The firm was fined $350,000 and ordered to pay $59,605 in restitution to two mutual fund families in connection with customer profits derived from improper market-timing.

In addition, Rafferty was ordered to review its procedures and certify that it has established systems and procedures to prevent late trading and deceptive market-timing, to retain electronic communications, and to record the times of receipt and entry of mutual fund orders.

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FINRA said it found that from about January 2001 through August 2003 the firm assisted six hedge fund customers in circumventing market-timing restrictions and escaping detection by opening and using multiple related customer accounts, as well as by using different broker branch codes for market-timing, among other methods.

From April 2001 through April 2002, the firm, acting through two brokers, permitted two hedge fund clients to continue market-timing while circumventing attempts by mutual fund companies to block or restrict such trading, FINRA claimed, resulting in approximately 118 additional mutual fund exchanges and yielding a net profit of about $59,605 at the expense of long-term investors in the mutual funds.

The regulator said Rafferty Capital lacked procedures designed to ensure that brokers who received notices of restricted or rejected mutual fund trades would notify their supervisors or the compliance department. In addition, there were no systems or procedures regarding how the firm should respond when receiving such notices.

FINRA decided the firm failed to establish, maintain, or enforce supervisory systems and written procedures reasonably designed to prevent and detect late trading.

During its investigation, FINRA also found that within the period January 2001 through July 2003, Rafferty Capital failed to:

  • preserve and maintain copies of all e-mail communications relating to the firm’s business;
  • create records accurately reflecting time of entry of 948 mutual fund orders;
  • create and preserve records of time of receipt of 26 mutual fund orders; and
  • maintain records of preliminary mutual fund orders from customers and originals of mutual fund orders that were changed or cancelled, including records relating to the cancellation of the orders.

Rafferty Capital neither admitted nor denied the charges.

Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using www.finra.org/brokercheck.

Compliance November 29, 2007

Court Trims Three Defendants from Trading Fraud Case

A federal judge in Massachusetts has thrown out civil fraud charges against three ex-executives of Putnam Fiduciary Trust Company (PFTC), but refused to dismiss charges against three others.
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U.S. District Judge Nathaniel M. Gorton of the U.S. District Court for the District of Massachusetts issued the ruling in a December 2005 case filed by the Securities and Exchange Commission (SEC), saying the SEC’s complaint did not allege sufficient conduct by three of the defendants to sustain the claims against them, according to an SEC announcement.

The SEC charged that the six defendants were involved in PFTC’s one-day delay in investing assets of a defined contribution client, Cardinal Health, Inc., in January 2001 (See SEC Charges Six Ex-Putnam Execs in Retirement Plan Fraud). The regulators claimed the Cardinal Health DC plan lost almost $4 million because of substantial market gains during that trading session.

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According to the allegations, the defendants improperly shifted approximately $3 million of the costs to shareholders of certain Putnam mutual funds through “deception, illegal trade reversals, and accounting machinations.” The SEC said the defendants improperly allowed the Cardinal Health plan to bear approximately $1 million of the loss without telling the client and then covered up their activities.

Gorton’s dismissal covered defendants:

  • Virginia Papa, of Newton, Massachusetts, a former managing director and director of defined contribution servicing;
  • Sandra Childs, of Duxbury, Massachusetts, a former managing director who had overall responsibility for PFTC’s compliance department; and
  • Kevin Crain, of Princeton, New Jersey, a managing director who had responsibility for PFTC’s plan administration unit.

At the same time, however, Gorton declined to dismiss allegations against:

  • Karnig Durgarian, of Hopkinton, Massachusetts, a former senior managing director and chief of operations for PFTC, as well as principal executive officer of certain Putnam mutual funds from 2002 through 2004;
  • Donald McCracken, of Melrose, Massachusetts, a former managing director and head of global operations services for PFTC; and
  • Ronald Hogan, of Saugus, Massachusetts, a former vice-president who had responsibility for new business implementation at PFTC.

More information about the case, SEC v. Durgarian, D. Mass., Civil Action No. 05-12618-NMG, 11/13/07, is here.

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