Two investment advisers and two portfolio managers were named as Respondents in market crisis related actions centered on claims that a close end fund employed undisclosed high risk trading strategies that caused it to eventually end in liquidation. In the Matter of Claymore Advisors, LLC, Adm. Proc. File No. 3-15139 (Dec. 19, 2012); In the Matter of Fiduciary Asset Management, LLC., Adm. Proc. File No. 3-15140 (Dec. 19, 2012); In the Matter of Mohammed Raid, Adm. Proc. File No. 3-15141 (Dec. 19, 2012). The two advisers settled. The two portfolio managers did not.
Claymore Advisors is a registered investment adviser to Fiduciary/Claymore Dynamic Equity Fund or HCE. Fiduciary Asset Management, LLC or FAMCO, served as the sub-adviser. Its managing director was Respondent Mohammed Raid who served as portfolio manager to HCE along with Respondent Kevin Swanson.
HCE’s primary investment strategy, according to its April 2005 registration statement, was to invest in equities and write call options on a substantial portion of those investments. This covered call strategy essentially traded the upside potential in the equities for current income from the option premiums received. HCE was marketed as a high income Fund which had an annual dividend equal to an 8.5% yield on the Funds initial public offering price.
Beginning in April 2007 FAMCO employed two new strategies. One called for HCE to write short-duration out-of-the-money S&P 500 put options. Under this strategy the Fund wrote put options and collected a premium from the purchaser in exchange for an agreement to compensate the buyer for declines in the S&P 500 beyond the strike price.
The Fund also began entering into short variance swaps. These were essentially bets on the volatility of the market keyed to whether it would be higher or lower than market expectations. The risks of these new strategies were not fully disclosed to Fund investors.
In September and October 2008 HCE realized about $45.4 million in losses which equaled about 45% of its net assets as of August 2008 on five written put options and variance swaps. Those trades contributed to a 72.4% decline in NAV over a two month period. FAMCO, through the portfolio managers, is alleged to have made misleading statements about HCE’s performance and strategies during the period. The Fund is now in liquidation.
The Order as to Claymore alleges it failed to reasonably supervise FAMCO and caused HCE’s failure to provide investors with the required disclosure. It alleges violations of Investment Company Act Rule 8b-16 which requires registered investment companies to amend their registration statements to include changes to the fund that are required to be disclosed. The Order as to FAMCO alleges violations of Section 34(b) of the Investment Company Act and Section 206(4) of the Advisers Act. The Order as to the individuals alleges violations of Exchange Act Section 10(b) and aiding and abetting FAMCO’s violations.
Claymore settled, consenting to the entry of a cease and desist order based on the Rule cited in the Order and agreeing to implement certain undertakings which include a plan to distribute its remaining assets to investors. FAMCO also consented to the entry of a cease and desist order based on the Sections cited in the Order which names it as a Respondent. The firm will pay disgorgement of $644,951, prejudgment interest and a civil penalty of $1.3 million. The proceeding against the portfolio managers will be set for hearing.