On November 22, 2010, the SEC charged Emil Busse, Jr., the former managing director of the securities lending program at FAF Advisors, Inc., for willfully aiding and abetting and causing FAF’s violations with respect to its securities lending program. The charges involve Mr. Busse’s role in violations of the antifraud provisions of the federal securities laws as the result of his attempt to prevent a mutual fund from dropping below a net asset value of $1.00 per share.
The securities lending program managed by FAF provided customers of its parent, U.S. Bank, the option of loaning securities they held at U.S. Bank to certain approved brokerdealers in exchange for cash collateral. Customers who participated in the program could then invest the cash proceeds into either the Prime Portfolio or the Bond Portfolio. The Bond Portfolio was not required to maintain an NAV of $1.00 per share and the bank was prepared to notify customers that the NAV may drop below $1.00. However, according to the SEC, Mr. Busse caused the reallocation of numerous loans of securities from customers invested in the Prime Portfolio to customers invested in the Bond Portfolio in an effort to increase the assets in the Bond Portfolio and enable the fund to keep its NAV at $1.00 per share. Eventually, Mr. Busse’s efforts failed and the NAV of the Bond Portfolio decreased to $0.99 per share. As a result of his actions, according to the SEC, certain customers in the inflated Bond Portfolio suffered losses of approximately $6 million. Mr. Busse agreed to pay a civil money penalty in the amount of $65,000.