SEC News

SEC Charges Portfolio Manager and Advisory Firm with Misrepresenting Risk in Mutual Fund

Washington D.C., Jan. 27, 2020 —

The Securities and Exchange Commission today announced charges against a New York-based investment adviser for misleading investors about the management of risk in a mutual fund. Catalyst Capital Advisors LLC (CCA) and its President and Chief Executive Officer, Jerry Szilagyi, agreed to pay a combined $10.5 million to settle the charges.  The SEC also filed a complaint in federal district court in Madison, Wisconsin, against Senior Portfolio Manager, Edward Walczak, for fraudulently misrepresenting how he would manage risk for the fund.

The SEC’s settled order against CCA and Szilagyi finds that, although CCA told investors that it abided by a strict set of risk parameters for the Catalyst Hedged Futures Strategy Fund, it breached those parameters and failed to take the required corrective action during a majority of the trading days between December 2016 and February 2017. As alleged, the fund lost hundreds of millions of dollars – approximately 20% of its value – from December 2016 through February 2017 as markets moved against it.  The SEC’s complaint against Walczak alleges that he told investors that the fund employed a risk management strategy involving safeguards to prevent losses of more than 8%, when in fact no such safeguards limited losses and Walczak did not otherwise consistently manage the fund to an 8% loss threshold.

“Fund managers must be truthful and transparent when describing their risk management procedures,” said C. Dabney O’Riordan, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.

Daniel Michael, Chief of the Division’s Complex Financial Instruments Unit, added, “Here, CCA’s misrepresentations, and Walczak’s alleged departure from his stated approach to managing risk, deprived investors of accurate information about an important aspect of the fund’s management.”

The SEC’s order finds that CCA violated the antifraud provisions of the federal securities laws, and that Szilagyi was a cause of CCA’s violations and failed reasonably to supervise Walczak. Without admitting or denying the findings, CCA and Szilagyi agreed to be censured, to cease and desist from future violations, and to certain undertakings as described in the order. CCA agreed to pay disgorgement of $8,176,722 plus prejudgment interest of $731,759, and a civil penalty of $1,300,000. Szilagyi agreed to pay a civil penalty of $300,000. The payments will be placed in a fair fund for distribution to affected investors. The SEC’s complaint against Walczak alleges that he violated the antifraud provisions of the federal securities laws and seeks a permanent injunction, disgorgement of ill-gotten gains, and a civil penalty. In parallel action, the Commodity Futures Trading Commission (CFTC) today announced settled charges against CCA and Szilagyi, and a district court action against Walczak. 

David Benson and Paul Montoya of the Asset Management Unit, Jake Schmidt and Jeffrey Shank of the Complex Financial Instruments Unit, and Terrence Moran conducted the investigation out of the SEC’s Chicago Regional Office. The SEC’s litigation against Mr. Walczak will be conducted by Senior Trial Counsel Michael Foster and Messrs. Benson and Schmidt. The related SEC examination of CCA was conducted by Linda Heaphy, Kathleen Furey, Kirk Lawrence, Edward Moy, and William Delmage of the SEC’s New York Regional Office. The SEC acknowledges the assistance of the CFTC.

Original Article

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