An SEC-registered investment adviser recently agreed to settle an SEC enforcement matter involving allegations that one of its portfolio managers illegally conducted prearranged trading or “parking” in order to favor certain advisory clients over others.
The portfolio manager, who is no longer employed with the investment advisory firm, conducted the prearranged trading in 2011 – 2012. The advisory firm was cited for its failure to uncover the portfolio manager’s illegal activities and to conduct reasonable supervision designed to detect such activities.
The SEC found that the portfolio manager arranged the sales of certain securities that needed to be liquidated in various client accounts with a broker-dealer trader at predetermined prices that would allow the portfolio manager to buy back the positions at a small mark-up into other managed accounts. The portfolio manager also sold additional securities at above-market prices to avoid incurring losses in certain accounts, and then repurchased the securities at above-market prices in a private fund managed by the portfolio manager. In all, the portfolio manager moved about $400,000 in previously unrealized losses from some client accounts to the private fund that took on those positions. All of these transactions were prearranged through the broker-dealer’s trader. The portfolio manager generally ignored the advisory firm’s internal controls with respect to conducting cross-trades.
The SEC’s allegations cited violations by the portfolio manager of the “anti-fraud” provisions under the Investment Advisers Act of 1940 and under the Securities Act of 1933. The portfolio manager agreed to pay a $125,000 penalty and to be barred from the securities industry for at least five years. The trader at the broker-dealer who assisted the portfolio manager with the pre-arranged trading also agreed to a securities industry bar. The investment advisory firm agreed to pay an $8.8 million penalty and to reimburse affected clients a total of $857,534.
The broker-dealer agreed to pay an $800,000 penalty and $211,093 in disgorgement and interest. The broker-dealer trader agreed to pay a $25,000 penalty, and be barred from the securities industry for three years.