Both the Commodity Futures Trading Commission and the Securities and Exchange Commission brought and settled enforcement actions against Catalyst Capital Advisors LLC and Jerry Szilagyi, Catalyst’s chief executive officer and majority owner, for the materially misleading statements of Catalyst and one of its portfolio managers regarding its risk controls. Catalyst is registered with the CFTC as a commodity pool operator and with the SEC as an investment adviser. Mr. Szilagyi also has various personal licenses with the SEC.
According to both agencies, Catalyst operates a number of funds including the Catalyst Hedged Futures Strategy Fund. The Fund was Catalyst’s largest, having over US $4 billion in assets under management in November 2016; the Fund invested in S&P futures options, mostly taking short positions. Although Catalyst and its agents represented that the Fund maintained strict risk controls that were designed to limit losses, the agencies’ alleged that the represented risk controls were often not in place. As a result, charged the agencies, when the market rallied 4.4% from February 9 through March 1, 2017, the Fund’s value declined over 19%.
The agencies charged that Catalyst’s misrepresentations operated as a fraud and that Catalyst failed to have an adequate supervisory system to detect and try to prevent misleading statements. The CFTC charged that Mr. Szilagyi was liable for Catalyst’s supervisory failures as a control person, while the SEC charged him with failure to supervise and otherwise being responsible for Catalyst’s principal offenses.
To resolve the agencies administrative proceeding, Catalyst agreed to pay US $1.3 million as a fine and almost US $9 million in disgorgement (including interest), while Mr. Szilagyi agreed to pay a fine of US $300,000. Payments made to one agency by the defendants will offset payment obligations to the other agency. In settling with defendants, the SEC acknowledged Catalyst’s voluntary remedial efforts, including enhancements to its risk management and supervisory functions, after its investigation of the investment manager began.
Separately, Edward Walczak, the Funds’s portfolio manager, was charged with making material misrepresentations by both agencies in separate complaints filed in a US federal court in Wisconsin. Both agencies seek an injunction, disgorgement and fines against the defendant.