Davenport Is Fined for Alleged Trading Abuses

Brokerage firm Davenport & Co. has been fined $450,000 by regulators and ordered to pay $288,000 in restitution for allegedly allowing two hedge funds to improperly trade in the long-term investments known as variable annuities.

The National Assn. of Securities Dealers, the brokerage industry’s self-policing organization, announced the civil penalties against Davenport on Tuesday. The Richmond, Va.-based firm neither admitted to nor denied the NASD’s allegations in agreeing to the settlement.

“We think this is a reasonable settlement,” said Thomas McGonigle, an attorney who represented Davenport in the case. “We look forward to moving on now.”

The NASD said it was the first case against a brokerage firm for allowing clients to improperly engage in market-timing of variable annuities, often described as mutual funds wrapped in an insurance policy. By contrast, federal and state securities regulators have brought a number of cases for improper market-timing, frequent “in-and-out” trading, of mutual funds since last fall.

Market-timing is not illegal but is widely restricted because it tends to skim profits from other shareholders.

The NASD also alleged that Davenport failed to adequately supervise its brokers to prevent some customers’ illegal late trading of mutual funds.

The NASD said the firm’s managers failed to stop the improper market-timing, which allegedly occurred from April 2002 to September 2003, even after receiving at least 10 letters from insurance companies expressing concern about signs of such activity.

The brokers handling the hedge funds’ accounts and managers at the firm were aware that the funds were engaging in improper market-timing techniques and that the prospectuses for the annuities stated that they were designed for long-term investors, not professional market-timers, the NASD said.

The $288,000 that Davenport is paying in restitution will go to other investors in the annuities.

The hedge funds involved were James River Partners and TFS Capital, said Michael York, a spokesman for Davenport.

The NASD said its investigation of individual brokers and other parties involved in the alleged improper market-timing continues.

The office of New York Atty. Gen. Eliot Spitzer, who initiated the mutual fund industry investigation, recently confirmed that it was investigating several companies that sell variable annuities for possible market-timing abuses.

In the last two years, the NASD has taken more than 80 disciplinary actions against brokers and investment firms for alleged abuses in sales of variable annuities, which are tax-deferred and a popular way to save for retirement. They are contracts between an investor and the company selling it in which the company agrees to make periodic payments to the investor, beginning immediately or at some future date.

The payments to the annuity holder vary and are determined by the performance of the underlying investments.

They often are sold by insurance companies, which place investors’ money in their own subaccounts that invest in mutual funds.