The National Association of Securities Dealers Inc. has imposed $2.25 million in penalties on a fund manager who traded frequently through variable annuities.

Paul Saunders, a registered broker who is chairman, chief executive officer and majority owner of James River Capital Corp., Manakin Sabot, Va., and its James River Securities Corp. affiliate, used large numbers of VA accounts to get around VA issuers’ restrictions on market timing, according to officials at the NASD, Washington.

The penalties include a $1.5 million fine for use of “deceptive practices to market time through variable annuities,” $750,000 in disgorgement of profits made through market timing, and a 60-day suspension of Saunders from his post as an executive at the James River Securities Corp.

“In settling with NASD, Saunders neither admitted nor denied the allegations, but consented to the entry of NASD’s findings,” NASD officials say.

Saunders acknowledges through a spokeswoman, Laura Rhoads, that he has entered into a settlement with the NASD regarding market timing.

But “we believe the NASD’s release was not a fair description of the settlement and was overly aggressive,” Saunders says in a statement released through Rhoads.

Speculators who time the market buy and sell rapidly in an effort to benefit from inefficiencies in the flow of financial information. The practice is not necessarily illegal, but the U.S. Securities and Exchange Commission discourages money managers from allowing unfettered marketing timing without thorough disclosures to investors because of concerns that market timing drives up fund costs for buy-and-hold shareholders.

NASD officials have noted that James River Capital Corp. is general partner and trading manager of the Jazzman Fund, a hedge fund established specifically to engage in market timing.

“After personally investing in Jazzman, Saunders, through JRCC, created 19 limited partnerships under Jazzman to increase the hedge fund’s ability to market time mutual fund sub-accounts of variable annuities,” NASD officials say. “While each Jazzman partnership appeared to be a separate entity, with a different name and tax identification number, the partnerships all had common owners–a fact that Saunders did not disclose to insurance companies that offered the variable annuities.”

From October 2001 through September 2003, Saunders used the Jazzman partnerships to get around insurers’ attempts to block or restrict frequent trading in sub-accounts of variable annuities, NASD officials say.

These practices and others “enabled Jazzman to execute approximately 1,000 variable annuity transactions, well in excess of insurance company limits for any single entity,” NASD officials say.

Saunders says in his statement that the annuity contracts all listed the same general partner and that each indicated that Saunders was an officer of the fund’s general partner.

“There were no violations of securities law, and no damage to any James River fund investor in connection with these market-timing activities,” Saunders says.

Saunders, who stopped timing the market 3 years ago, says he has settled the NASD allegations for the purpose of avoiding a protracted enforcement proceeding.

The suspension will have no impact on Saunders’ activities or responsibilities on behalf of James River’s affiliated fund management business or any of its affiliated funds, James River says.