On May 17, 2022, the SEC charged a registered investment advisor ("RIA") and three former senior portfolio managers with fraud involving concealment of the downside risks of a complex options trading strategy (the "Strategy"). Following the COVID-19 market crash in March 2020, the scheme was exposed. The Strategy was sold to 114 institutional investors, including pension funds. The RIA has agreed to pay $1 billion to settle SEC charges and with its parent over $5 billion in victim restitution.

The SEC's complaint alleges the Strategy's lead portfolio manager orchestrated the scheme and, with assistance from other senior portfolio managers, manipulated financial reports and information. They allegedly manipulated information to present lower-than-accurate losses in a market crash scenario and smoothed performance data. Furthermore, the complaint alleges that the lead portfolio manager and other senior portfolio managers made multiple efforts to conceal their conduct from the SEC. The RIA plead guilty and admitted that its conduct violated federal securities laws. The RIA agreed to a cease-and-desist order, and certain financial penalties and disgorgement. As a result, the RIA is automatically disqualified from providing advisory services to US-registered investments for 10 years and will exit these businesses subject to brief transition periods. The SEC's complaint also seeks additional penalties against the leading portfolio managers, including permanent injunctions, disgorgement, plus interest and penalties. In tandem, the US Southern District of New York has also announced criminal charges against the RIA and the leading portfolio managers of the Strategy.

In response to this action, SEC Chair Gary Gensler called for further investor protections. He said, "[t]his case once again demonstrates that even the most sophisticated institutional investors, like pension funds, can become victims of wrongdoing. Unfortunately, we've seen a recent string of cases in which derivatives and complex products have harmed investors across market sectors." Chair Gensler continued, "The Commission stands ready to use all appropriate tools to protect investors, including upholding prohibitions against certain activities by the guilty parties."

Originally published in REVERSEinquiries: Volume 5, Issue 2.
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