A mutual fund and its CEO settled CFTC and SEC charges (see here and here) for making materially misleading statements regarding the fund's risk management practices. The agencies also filed charges against the mutual fund's portfolio manager.
According to the Orders, the mutual fund - which is registered with the CFTC as a CPO and the SEC as an investment adviser - and its CEO made material misrepresentations by stating that (i) strict risk management protocols were in place (e.g., stop-loss measures to limit losses) and (ii) risk metrics were reviewed daily by a dedicated risk manager. Additionally, the agencies stated that the mutual fund and CEO failed to implement a supervisory system that ensured truthful marketing and that risk management practices were reported to investors.
To settle the CFTC charges, the mutual fund and CEO agreed to (i) cease and desist from violating CFTC rules, (ii) pay separate civil monetary penalties of $1.3 million and $300,000, and (iii) comply with the remedial conditions and undertakings outlined in the Offer.
To settle the SEC charges, the mutual fund and CEO agreed to (i) cease and desist from violating SEC rules, (ii) a censure, (iii) pay disgorgement, prejudgment interest and civil monetary penalties totaling $10,508,481 and (iv) comply with the form of payment requirements.
The CFTC and SEC also filed complaints (see here and here) in the U.S. District Court of the Western District of Wisconsin against the mutual fund's portfolio manager for fraud. According to the Complaints, the portfolio manager (listed as a Principal of one CPO and registered as an associated person for two CPOs) - and who was cited as the "public face" of the mutual fund by the CFTC - relied on selling call options on S&P futures contracts.
The CFTC and SEC alleged that in order to mitigate the risk of selling the call options, the portfolio manager falsely stated that he (i) used sophisticated options portfolio software to manage risk and (ii) would trade to eliminate the risk if stress tests indicated that the mutual fund could lose more than eight percent of its value. The CFTC asserted that the portfolio manager was aware of, and repeatedly chose to accept, the risk of loss that exceeded eight percent. The SEC contends that the portfolio manager breached his fiduciary duty as an investment adviser to a mutual fund, causing it to lose approximately $700 million in assets. The CFTC argued that the portfolio manager caused at least $500,000,000 in investor losses as a result of a market rise in February of 2017.
The CFTC is seeking an order against the portfolio manager enforcing (i) an enjoinment of the violative acts and practices, (ii) compliance with CFTC rules and (iii) civil monetary penalties in the form of disgorgement and restitution.
The SEC is seeking an order against the portfolio manager enforcing (i) a permanent enjoinment of the violative acts and practices, (ii) a disgorgement of all ill-gotten gains, including prejudgment interest, (iii) a civil monetary penalty and (iv) further relief within the jurisdiction of the Court.
Commentary Steven Lofchie
This case illustrates the overlapping authority and jurisdiction of the SEC and the CFTC.
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