On August 27, 2013, the SEC settled an enforcement action by imposing sanctions against a former portfolio manager at Boulder Investment Advisers, LLC (“Boulder”), a Colorado-based investment adviser, for forging documents and misleading his firm’s and the funds’ chief compliance officer (the “CCO”) in order to conceal the portfolio manager’s failure to report his personal trading activities. In addition to violations of Rule 17j-1 under the 1940 Act, which requires reporting of personal securities transactions by portfolio managers and other “Access Persons,” the SEC also asserted violations of Rule 38a-1(c) under the 1940 Act, which prohibits an officer, director, or an employee of a fund, or its investment adviser, from directly or indirectly taking any action to coerce, manipulate, mislead, or fraudulently influence the fund’s CCO in the performance of his or her duties under the 1940 Act. According to the SEC’s press release announcing the commencement of this action, this is the first case in which the SEC has asserted a violation of Rule 38a-1(c).
As alleged in the SEC’s order, the portfolio manger failed to report or pre-clear with the CCO approximately 640 of the 850 total trades he made from 2006 to 2010, in violation of the 1940 Act and Boulder’s code of ethics. These included at least 91 trades involving securities held or to be acquired by four closed-end funds managed by Boulder and its affiliates and 14 trades that did not comply with restrictions in Boulder’s and the funds’ joint code of ethics. In order to conceal his trading, the SEC asserted that the portfolio manager submitted false quarterly and annual reports and falsely submitted annual certifications of his compliance with the code of ethics. The SEC also alleged that the portfolio manager physically altered brokerage statements, trade confirmations, and pre-clearance approvals that were submitted to Boulder. After identifying certain irregularities in the documents detailing his securities transactions, the CCO began to make inquiries of the portfolio manager. According to the settlement order, the portfolio manager allegedly misled the COO by saying that certain brokerage accounts were closed when they remained open and reflected trades that were not pre-cleared as required by Boulder’s code of ethics. The SEC also alleged that the portfolio manger then accessed the hard copy file of previously submitted brokerage statements and physically altered these records to create the false impression that his trading complied with the code of ethics.
The defendant neither admitted nor denied the SEC’s findings, but agreed to pay monetary damages (including over $230,000 in disgorgement and a civil penalty of $100,000) and consented to a five-year ban from the industry. The SEC Settlement Order is available here.