The SEC recently filed a settled enforcement action charging Charles J. Marquardt with insider trading in shares of the Evergreen Ultra Short Opportunities Fund (the Ultra Fund), a mutual fund that invested primarily in mortgage-backed securities. At the time of the insider trading, Marquardt was the Senior Vice President and Chief Administrative Officer for operations of Boston-based Evergreen Investment Management Company, LLC (Evergreen), the investment adviser to the Ultra Fund.
The SEC’s complaint alleged that Marquardt learned on June 11, 2008, that the Ultra Fund might soon reduce the value it assigned to several of its mortgage-backed securities holdings, a move that would likely decrease the Fund’s per share net asset value (NAV) and might cause the Fund to close. They further alleged that on the next day, Marquardt redeemed all of his Ultra Fund shares and caused a family member to do the same. Over the next several days, the Fund decreased the value it assigned to these holdings, triggering significant reductions in the Fund’s NAV. Eight days after Marquardt had learned about the plans to revalue the securities, Evergreen publicly announced that the Ultra Fund would be liquidated. By redeeming all of his shares before the closing of the Fund, the SEC estimated that Marquardt avoided losses of $4,803, while the tipped-off family member avoided losses of $14,304.
The SEC’s complaint stated that as a senior officer, Marquardt had a fiduciary duty to Evergreen not to trade in the Ultra Fund while in possession of material, nonpublic information about the Fund. In addition, Marquardt was subject to Evergreen’s insider trading policy, which prohibited him from trading in any Evergreen fund, including the Ultra Fund, while in possession of material, nonpublic information.
To settle the charges, Marquardt consented, without admitting or denying the allegations in the complaint, to the entry of a final judgment permanently enjoining him from violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Marquardt also agreed to pay $19,107 in disgorgement, representing the losses that he and his family member avoided, $1,242 in prejudgment interest and a $19,107 civil penalty. In separate administrative proceedings to be instituted after the entry of the permanent injunction, Marquardt also consented to be barred from association with any broker, dealer or investment advisor, with a right to reapply after two years.
The enforcement action comes at a time when regulators are probing possible insider trading at a number of hedge funds. According to David Bergers, the head of the SEC’s Boston office: “We are committed to pursuing insider trading wherever it occurs. … When mutual fund insiders abuse their positions of trust and trade on inside information, we will hold them accountable.”1
SEC Agrees to Proposed Settlement with Former Mutual Fund Manager Convicted of Insider Trading
The SEC has reached an agreement on a proposed settlement with Steven E. Nothern, the former Massachusetts Financial Services Company mutual fund manager who was found liable for insider trading in June 2009. The SEC brought an action against Nothern for insider trading in 2003 in connection with his purchase of, and tipping others to purchase, U.S. Treasury 30-year bonds ahead of the Oct. 31, 2001, Treasury Department announcement that it was suspending the future issuance of long bonds. The SEC estimated that Nothern’s insider trading scheme generated approximately $3.1 million in illegal profits. In June 2009, a federal jury in Boston returned a verdict in the SEC’s favor, finding that Nothern violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The SEC sought a permanent injunction, disgorgement with pre-judgment interest and a civil money penalty. Under the proposed settlement, Nothern has agreed to pay a civil penalty of $460,000 and to be enjoined from future violations of Section 10(b) of the Exchange Act. Nothern has also agreed to be barred from association with any investment adviser, with the right to reapply after five years in a separate administrative proceeding before the SEC. The proposed settlement is subject to court approval.