Oppenheimer pays $4.5m to settle FINRA market timing charges

Source: Financial Industry Regulatory Authority

The Financial Industry Regulatory Authority (FINRA) announced today that Oppenheimer & Co. will pay a fine of $250,000 for supervisory and other failures in connection with improper market timing of mutual fund shares from January through September 2003.

The firm will also pay $4.25 million in restitution to more than 60 mutual fund companies.

"Market timing harms long-term fund investors who ultimately bear the brunt of higher costs long after market timers have moved on to the next quick trade," said Susan Merrill, FINRA Executive Vice President and Chief of Enforcement. "Oppenheimer's lack of appropriate supervisory systems and controls led to the firm's failure to heed hundreds of warnings and requests it received from mutual funds and life insurance companies for the firm's brokers to cease this trading for hedge funds."

Market timing is short-term buying and selling of mutual fund shares to take advantage of inefficiencies in mutual fund pricing. Market timing can harm long-term mutual fund shareholders because it can dilute the value of their shares. While not illegal per se, market timing is prohibited by the vast majority of mutual funds.

FINRA found that Oppenheimer failed to prevent a group of five traders' improper, short-term trading of mutual funds on behalf of hedge fund customers - activity that yielded about $9 million in gross revenue for the firm. Oppenheimer also failed to establish, maintain or enforce supervisory systems and written procedures to detect and prevent improper market timing activities, or to maintain required books and records of the short-term trading of mutual funds through other firms' trading platforms.

During the relevant period, the group maintained about 580 accounts for 15 hedge fund customers in an attempt to circumvent market timing trading blocks put in place by the mutual funds. The multiple accounts also served to conceal the true identity of the account holders and allowed the group to spread timing money across accounts, instead of trading one lump sum, which the mutual funds might have rejected.

For example, between April 2003 and September 2003, the group opened 37 accounts for one hedge fund customer so the customer could continue trading in a particular fund despite receiving notices prohibiting further trading from the fund. From April 1, 2003 to April 25, 2003, the group executed market timing trades in the Seligman Fund in 10 of the customer's accounts. As a result, on April 25, 2003, Seligman blocked trading in those accounts for 90 days due to a pattern of excessive trading.

FINRA found that, in an effort to evade the trading restrictions, on May 6, 2003, the group opened six new accounts for that same customer and continued trading in the Seligman Fund in both the new and the blocked accounts. On May 28, 2003, Seligman blocked those six new accounts for 90 days, again due to excessive trading. To evade the most recent blocks, the group executed trades in the mutual fund in 10 additional accounts for the same customer, leading the Seligman Fund, on June 30, 2003, to block those new accounts from further trading for 90 days.

FINRA also found that the group used 51 different registered representative numbers to create the appearance that the trades were coming from registered representatives who had not previously been blocked from trading.

Oppenheimer received about 200 communications from 65 mutual fund companies advising the firm that short-term trading activity was detrimental to long-term shareholders. Some communications indicated that the group was no longer permitted to trade at all within the mutual funds' family of funds. Nevertheless, the firm failed to monitor the group's activities, allowing improper market timing practices to continue. FINRA also found that the group used "omnibus" trading platforms operated by Schwab and Fidelity to disguise the group's identity so it could continue market timing in funds that had blocked or rejected the group's customers' trades. During the relevant period, the group placed approximately 3,700 improper trades on behalf of 99 accounts in 173 mutual funds through the Schwab and Fidelity trading platforms. Additionally, the firm failed to create or maintain records of the group's trading through the Schwab and Fidelity platforms.

FINRA further found that the group sold variable annuity contracts to its hedge fund clients to allow them to use the annuity sub-accounts as yet another vehicle for market timing mutual funds. During the relevant period, the group - with the approval of at least some senior managers - purchased 159 variable annuity contracts on behalf of their hedge fund clients. Oppenheimer received at least 17 communications from the life insurance companies that issued the contracts restricting the group's trading. Despite these communications, the firm failed to prevent the group from market timing in annuity sub-accounts.

Oppenheimer settled this action without admitting or denying the charges, but consented to the entry of FINRA's findings.

All five traders involved in the improper market timing have been barred from the securities industry for failure to cooperate with the regulatory investigation of the misconduct at Oppenheimer. One trader has appealed the bar to the Securities and Exchange Commission.

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