BOSTON (CN) – Financial brokers behind a $900 million market timing scheme will have to disgorge their ill-gotten gains, a federal judge said.
The SEC claimed that from 2001 to 2003, the Druffner Group, a brokerage team at the Boston branch of Prudential Securities Inc. (PSI), “violated securities laws by engaging in market timing activities through false statements and intentional misrepresentations,” according to the 10-page ruling from U.S. District Judge Nathaniel Gorton.
The SEC brought a civil enforcement action against six people. Gorton ruled in this case on an SEC motion for disgorgement and penalties against Martin J. Druffner and Skifter Ajro.
“In particular, the defendants used multiple broker identification numbers (financial advisor numbers, hereinafter ‘FA numbers’) and opened numerous customer accounts to evade restrictions on market timing,” Gorton wrote.
“The Druffner Group used 13 different FA numbers, despite the fact that it only had five customers. Regardless of the FA number used for a particular transaction, the Druffner Group split the commission in a constant ratio, i.e. 70 percent for Druffner, 20 percent for Ficken and 10 percent for Ajro. The Druffner Group also opened over 170 customer accounts under fictitious names.
“Such practices concealed the identities of the brokers and their clients, thereby making it difficult for the funds to detect the market timing activities. As a result, the mutual funds processed transactions that would otherwise have been rejected. When mutual fund companies detected defendant brokers’ market timing activities and imposed blocks on such market timing, the defendant brokers switched to using unblocked FA numbers and customer accounts to evade the restrictions.”
In total, the market timing trades involved 25 fund companies and exceeded $900 million. Martin Druffner, the group’s leader, earned more than $2 million in commissions, and Skifter Ajro market-timed his way to more than $250,000.
The SEC filed its initial complaint in 2003, and in 2006 a federal court entered judgments against Druffner and Ajro, permitting the SEC to move for an order to pay disgorgement and civil penalties.
Gorton rejected the defendants’ contention that they “‘have already paid a heavy price for their conduct’ and thus disgorgement is unnecessary”.
Sorry, Gorton wrote: “Disgorgement orders are necessary to deprive the wrongdoers of their ill-gotten gains” and to deter such activity in the future.
Gorton focused on the volume of the group’s market timing activities and said that “financial hardship is not a ground for denying disgorgement.”
Druffner allegedly is unemployed today, but the court found that “his 2009 joint tax return indicates an annual salary of approximately $30,000” and that his “net worth is approximately $750,000.”
Ajro is making $76,000 a year today and has a net worth of $27,000, according to the ruling.
The court conceded that “the materials submitted by defendants raise the possibility that some of the commissions are not causally related to the underlying securities violations,” but found that these materials failed to specify the amounts involved.
The brokers were not total losers, however, as Gorton found that “the imposition of civil penalties against defendants Druffner and Ajro is unwarranted … in light of the substantial disgorgement that will be ordered.”
Gorton ordered Druffner to disgorge $1 million plus prejudgment interest in an amount to be determined, and Ajro to disgorge $110,000 plus prejudgment interest.