NASD announced today that it has filed a complaint against A.B. Watley Direct, Inc. (ABW Direct) of New York, and its former registered representatives, Robert Conway and Kenneth Ng, charging them with facilitating late trading and improper market timing of mutual funds on behalf of hedge fund clients.
NASD also charged ABW Direct's President, Robert Malin, and Executive Vice President, Linus Nwaigwe, with supervisory lapses. Conway and Ng were brokers registered with both ABW Direct and A.B. Watley, Inc. (ABW Inc.). ABW Inc is an affiliated entity that was formerly a registered broker-dealer, but was expelled by NASD in 2004 for failure to pay fines levied in prior disciplinary actions. Both ABW Direct and ABW Inc. are subsidiaries of A.B. Watley Group, Inc. (ABW Group), a publicly traded company.
"Market timing in violation of a mutual fund's limitations and late trading of fund shares are both unethical and harmful to fund shareholders," said James S. Shorris, NASD Executive Vice President and Head of Enforcement. "Firms cannot enrich a few favored customers at the expense of a fund's long-term shareholders."
In its complaint, NASD charged that from approximately July 2002 until September 2003, Conway and his assistant Ng facilitated late trading. Late trading is the unlawful practice of placing mutual fund orders after the fund has calculated its daily net asset value (NAV) - typically at 4 p.m. EST - but receiving the price based upon that earlier, 4 p.m. calculation. Firms accepting mutual fund orders after the 4 p.m. NAV calculation are supposed to execute them at the following day's NAV in accordance with the Securities and Exchange Commission's "forward pricing rule."
The complaint alleges that Conway and Ng utilized a computerized trading platform that enabled them to enter orders on behalf of ABW Direct and ABW Inc. clients for at least an hour after the 4:00 p.m. market close without observing the forward pricing requirements. The brokers' hedge fund customers would send emails or faxes containing "indications of interest" in proposed mutual fund transactions that the hedge funds might or might not execute that day. The "indications of interest," however were not the customers' actual orders. Subsequent to sending the "indication of interest," the customers would telephone Conway and Ng and verbally instruct them which of the "indications of interest" to enter as actual orders. In at least 243 transactions at ABW Direct and ABW Inc., Conway and Ng entered transactions after 4 p.m. where emails show that the "indications of interest" were also not received until after 4 p.m., after the funds' NAVs had been calculated.
The complaint further charges that ABW Direct and ABW Inc. failed to maintain required books and records for mutual fund transactions. The firms did not record the time that they received customer orders for the transactions, thus leaving open the possibility that Conway and Ng engaged in late trading in thousands of additional transactions where records showed that Conway and Ng entered orders after 4 p.m.
In addition to the problems regarding late trading, the complaint alleges that during the period of July 2002 to September 2003, Conway and Ng also helped their clients engage in deceptive market timing. Conway and Ng systematically disregarded "block letters" and other directives from mutual fund companies (and from the clearing firm for ABW Direct and ABW Inc.) that restricted the hedge fund clients' market timing trades. NASD charged that in at least 405 instances, Conway and Ng submitted transactions through accounts at ABW Direct and ABW Inc. where they either knew or should have known that the transactions were in violation of funds' restrictions on market timing.
To facilitate the impermissible market timing, the complaint alleges that Conway and Ng helped clients set up multiple accounts, utilizing different names and even utilizing different branch codes in an effort to conceal the clients' efforts to evade market timing restrictions; opened multiple accounts for one client at both ABW Direct and ABW Inc. in an effort to conceal the client's identity; and, ignored a directive from ABW Direct's and ABW Inc.'s clearing firm that the firms cease trading in international mutual funds until they had provided a written commitment to the clearing firm that they would abide by mutual fund prospectus trading limitations.
NASD charged that Conway and Ng's misconduct could not have occurred without the supervisory lapses by Nwaigwe and Malin. Nwaigwe is the Chief of Compliance of ABW Direct and also held that position at ABW Inc. Nwaigwe is charged with having failed to perform supervisory duties delegated to him that should have led him to discover the wrongful activity. For example, Nwaigwe did not review Conway's and Ng's incoming and outgoing correspondence and emails and, as a result, never saw the communications from the mutual fund companies and the firms' clearing firm complaining about impermissible market timing. Nwaigwe was also the person with responsibility for updating ABW Direct's and ABW Inc.'s written procedures, and NASD charged that he failed to include procedures designed to prevent late trading and impermissible market timing.
Malin is the President of ABW Direct and held that position at ABW Inc. He is charged with having failed to take reasonable steps to ensure that Nwaigwe was performing supervisory functions assigned to him.
Under NASD rules, a firm or individual named in a complaint can file a response and request a hearing before and NASD disciplinary panel. Possible remedies include a fine, censure, suspension, or bar from the securities industry, and disgorgement of gains associated with the violations.
The issuance of a disciplinary complaint represents the initiation of a formal proceeding by NASD in which findings as to the allegations in the complaint have not been made and does not represent a decision as to any of the allegations contained in the complaint. Because this complaint is unadjudicated, interested persons may wish to contact the respondent before drawing any conclusions regarding the allegations in the complaint.