News Release

NASD Fines Hedge Fund Manager $2.25 Million for Deceptive Market Timing in Variable Annuities

Washington, DC — NASD announced today that it has imposed its largest fine ever against an individual for market timing - a $2.25 million sanction against hedge fund manager Paul Saunders, a registered broker who is Chairman, CEO and majority owner of James River Capital Corporation (JRCC) of Richmond, VA. The fine, for using deceptive practices to market time through variable annuities, includes disgorgement of approximately $750,000 in illicit profits. NASD also suspended Saunders for 60 days.

NASD's investigation into the activities of the brokers who assisted Saunders' market timing is continuing.

"Deceptive market timing designed to exceed prospectus limitations and evade insurance company and mutual fund restrictions not only violates ethical standards but may also harm investors," said James S. Shorris, Executive Vice President and Head of Enforcement. "The enforcement action announced today makes clear that brokers, including those who operate as hedge fund managers, will be held accountable for this kind of misconduct and will be required to disgorge their profits and pay a substantial penalty."

JRCC is general partner and trading manager of the Jazzman Fund, a hedge fund established specifically to engage in market timing. After personally investing in Jazzman, Saunders, through JRCC, created 19 limited partnerships under Jazzman to increase the hedge fund's ability to market time mutual fund sub-accounts of variable annuities. While each Jazzman partnership appeared to be a separate entity, with a different name and tax identification number, the partnerships all had common owners - a fact that Saunders did not disclose to insurance companies that offered the variable annuities.

NASD found that from October 2001 through September 2003, Saunders used these Jazzman partnerships to engage in numerous deceptive practices to evade attempts by insurance companies to block or restrict his market timing in sub-accounts of variable annuities.

Saunders opened 20 different accounts for the Jazzman partnerships at one broker-dealer and commenced market timing through variable annuity sub-accounts, sometimes simultaneously purchasing contracts and trading in the same annuity through several Jazzman partnerships. After receiving communications from insurance companies restricting further market timing, the Jazzman hedge fund, under Saunders' direction, used three deceptive practices to continue market timing:

  • Saunders purchased contracts in the same variable annuity for other Jazzman partnerships and continued trading through those contracts;
  • Saunders obtained additional contracts in the same variable annuity, but changed the name of the annuitant. All of the annuitants were actually employees of entities Saunders controlled; and
  • When certain insurance companies rejected an annuity contract because it was purchased with a large initial investment, Saunders purchased another contract with a much smaller initial investment. When that contract was accepted, Saunders transferred funds from accounts of other related Jazzman partnerships to the accepted contract and then began market timing in the contract's sub-accounts.

These practices enabled Jazzman to execute approximately 1,000 variable annuity transactions, well in excess of insurance company limits for any single entity. Saunders personally made approximately $750,000 in illicit profits from the deceptive conduct.

In settling with NASD, Saunders neither admitted nor denied the allegations, but consented to the entry of NASD's findings.

NASD has previously sanctioned 16 individual brokers, supervisors and principals for impermissible market timing, imposing fines ranging from $10,000 to $375,000 and suspensions ranging from 23 days to one year. Contested charges are pending against four other individuals.

Investors can obtain more information about, and the disciplinary record of, any NASD-registered broker or brokerage firm by using NASD's BrokerCheck. NASD makes BrokerCheck available at no charge to the public. In 2004, members of the public used this service to conduct more than 3.8 million searches and request almost 190,000 reports for existing brokers or firms. Investors can link directly to BrokerCheck at Investors can also access this service by calling (800) 289-9999.

NASD is the leading private-sector provider of financial regulatory services, dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business - from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and registered firms. For more information, please visit our Web site at