On December 14, 2009, the SEC charged investment adviser Ark Asset Management Co., Inc., and Stephen Jay Mermelstein, Ark’s COO, for trade allocation violations. According to the SEC’s order, a portfolio manager at Ark favored the NorthStar Funds (hedge funds) over the client accounts in the allocation of securities between August 2000 and December 2003.
According to the SEC, the portfolio manager placed orders for securities, but changed or delayed making allocations of the purchases and sales until after the order had been filled, which allowed the portfolio manager to allocate more favorable trades to the hedge funds. As a result of this fraudulent conduct, according to the SEC, Ark realized at least $19 million of ill-gotten gains in the form of performance fees from the hedge funds.
According to the SEC, when placing trades, neither the portfolio manager nor the traders who worked for him documented how the trade would ultimately be allocated between the two sets of accounts. While each set of accounts had different order tickets, orders were routinely written on an order ticket for one of the two sets of accounts. The order tickets, however, allegedly did not reflect how the portfolio manager would ultimately decide to allocate the securities, and in some instances, traders were directed to move an order from one set of accounts to the other by creating a new order ticket, transferring the security to that ticket and discarding the old order ticket.
Ark is required to file an answer to the SEC’s order within 20 days after service of the SEC’s complaint. Mr. Mermelstein has agreed to pay a civil money penalty in the amount of $50,000.