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.).
“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 Shorris, NASD Executive Vice President and Head of Enforcement, in an NASD news release. “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 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.
According to NASD, the brokers’ hedge fund customers would send e-mails 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 e-mails show that the “indications of interest” were also not received until after 4 p.m., after the funds’ NAVs had been calculated.
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, according to the news release. 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, NASD charged, 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.