On May 11, 2010, the SEC initiated administrative proceedings against David W Baldt due to his alleged disclosure of material non-public information concerning the Schroder Short-Term Municipal Bond Fund. During 2003 to 2008, Mr. Baldt served as portfolio manager of the Fund. According to the SEC order, several members of Mr. Baldt’s family invested the bulk of their life savings in the Fund and during the deteriorating market conditions of late 2008, Mr. Baldt told a family member that she should sell her shares and that she should tell another family member the same.
Specifically, the SEC alleged that on September 17, 2008, one of Mr. Baldt’s family members called him for advice about what to do with her investment in the Fund. He allegedly advised her that, if her concerns about the investment were preventing her from sleeping at night, she should sell her investment and invest in U.S. Treasury bills. In addition, Mr. Baldt allegedly told that family member that she should tell a second family member to do the same. According to the SEC, the same family member and Mr. Baldt had another conversation on October 3, 2009, in which Mr. Baldt told her that she “really should consider [her] inclination to sell” her Fund shares. When the family member noted that she had already started selling subsequent to their September 17th conversation, Mr. Baldt allegedly emphasized that she should “go the full route” and told her to tell the second family member to do the same.
As a result, family members redeemed approximately $200,000 in Fund shares between October 6th and 7th. Subsequently, Mr. Baldt’s family members attempted, but failed, to redeem $3,068,117 worth of Fund shares as the Fund gave shareholders notice that it was liquidating on October 14, 2008 and suspending cash redemptions.
According to the SEC order, at the time of his October 3rd conversation with his family member, Mr. Baldt possessed material non-public information concerning the Fund since he knew that the Fund was receiving mounting and significant redemption requests at a time when sales of portfolio securities were adding downward pressure on municipal bond prices, management had given him a directive to keep 10 to 20% of the Fund’s assets in cash, redemption requests were likely to increase as the Fund’s adviser was putting out a large percentage of its municipal bond portfolio to bid and that liquidating the Fund was a potential option.