The SEC fined and barred an investment bank’s head CMBS trader for lying to customers about pricing, spreads, and compensation over a 2-year period. According to the SEC, the defendant oftentimes used elaborate stories and doctored documents to support his untrue statements. The SEC asserts that clients relied on the incorrect information when making purchase/sale decisions. The SEC maintains that the respondent knowingly ignored compliance policies requiring truthfulness in dealings with customers. The defendant benefitted through higher discretionary bonuses resulting from his illicit activities, thereby making him directly liable for securities fraud.
OUR TAKE: It is noteworthy that the SEC took action against the trader himself rather than his firm, which presumably avoided liability because it had implemented adequate policies and procedures. SEC Commissioner Piwowar has previously indicated that the SEC should pursue individuals rather than firms.
The manager of a large bond ETF agreed to pay nearly $20 Million, including an $18.3 Million penalty, for mis-pricing securities and presenting an incorrect NAV to the Board, investors, and prospects. The SEC charges that the firm inflated reported performance by purchasing odd lot non-agency MBS at a discount but using the higher round lot prices for valuation purposes. The SEC asserts that several people knew about the strategy but failed to ensure that the firm accurately priced the securities. The SEC faults the firm for making misrepresentations to the Board as well as in shareholder reports and marketing materials. In addition to disgorgement and penalties, the respondent agreed to retain an independent compliance consultant. The SEC’s Enforcement Director admonished, “Investment advisers must accurately describe the significant sources of performance and the strategies being used.”
OUR TAKE: When performance looks too good to be true, it probably is. Outperformance in and of itself is a compliance red flag that should draw increased scrutiny.
A large mutual fund firm agreed to reimburse investors approximately $18 Million and pay a $3.9 Million fine for failing to properly remediate NAV pricing errors. According to the SEC, the respondent discovered that its fair valuation process under-valued certain illiquid securities over a 30-month period by failing to include required inputs. The firm attempted remediation by contributing $27 Million to the funds. However, the SEC argues that the contribution failed to examine the impact to every shareholder and ultimately understated the impact to investors. The SEC faults the firm for failing to follow its own fair valuation and NAV error correction policies in violation of the Advisers Act and the Investment Company Act.
OUR TAKE: There is no easy way to correct NAVs over an extended period of time. Re-processing trades is expensive and time-consuming and can lead to fairly significant reimbursement checks. However, trying to shortcut the remediation only leads to bigger problems, such as public enforcement actions. The compliance lesson is to work very diligently on the fair valuation process.