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Archive for November, 2013

SEC Announces Fraud Charges Against Detroit-Based Money Market Fund Manager

The Securities and Exchange Commission today announced fraud charges against a Detroit-based investment advisory firm and a portfolio manager for deceiving the trustees of a money market fund and failing to comply with rules that limit risk in a money market fund’s portfolio. 

 Money market funds seek to maintain a stable share price by investing in highly safe securities.  Under the federal securities laws, a money market fund may only invest in securities determined by the fund’s board of trustees to present minimal credit risk.

 The SEC’s Enforcement Division alleges that Ambassador Capital Management and Derek Oglesby repeatedly made false statements to trustees of the Ambassador Money Market Fund about the credit risk in the securities they purchased for its portfolio.  Trustees also were misled about the fund’s exposure to the Eurozone credit crisis of 2011 and the diversification of the fund’s portfolio. 

 “Money market fund managers must not hide the ball from a fund’s board,” said George S. Canellos, co-director of the SEC’s Enforcement Division.  “Ambassador Capital Management and Oglesby weren’t truthful about whether securities in the portfolio threatened to destabilize the fund, and they failed to operate under the strict conditions designed for money market fund managers to limit risk exposure and maintain a stable price.”

 The enforcement action stems from an ongoing analysis of money market fund data by the SEC’s Division of Investment Management, in this case a review of the gross yield of funds as a marker of risk.  The performance of the Ambassador Money Market Fund was identified as consistently different from the rest of the market.  Upon further examination by the SEC’s Office of Compliance Inspections and Examinations, the matter was referred to the Enforcement Division’s Asset Management Unit for investigation.

The Enforcement Division’s investigation found that Ambassador Capital Management and Oglesby misrepresented or withheld critical facts from the fund’s trustees:

  • The firm’s self-imposed holding period restrictions were frequently exceeded for securities in the fund’s portfolio.
  • The fund regularly purchased securities that had greater than minimal credit risk under the firm’s own guidelines.
  • Throughout the Eurozone credit crisis in 2011, the fund continually purchased securities issued by Italian-affiliated entities despite Oglesby’s claim that Ambassador Capital Management was trying to stay away from Italian exposure and would unload even secondhand exposure to the Italian market.
  • The fund’s portfolio was not sufficiently diversified and thus had not reduced risk exposure as portrayed to trustees.

According to the SEC’s order instituting administrative proceedings, Ambassador Capital Management also caused the fund to deviate from the risk-limiting provisions of Rule 2a-7 under the Investment Company Act of 1940.  The firm also failed to conduct an appropriate stress test of the fund’s portfolio.  Since the Ambassador Money Market Fund failed to follow the risk-limiting provisions of Rule 2a-7, it was not permitted to use the amortized cost method of valuing securities under which it priced its securities at $1 per share.  It also shouldn’t have been represented to investors as a money market fund.

Supreme Court To Review Halliburton Case

The U.S. Supreme Court has granted certiorari in Halliburton v. Erica P. John Fund, setting up what could be the most important securities litigation decision in the last twenty-five years. At issue is the continued validity of the fraud-on-the market-theory, whereby reliance by investors on a misstatement is presumed if the company’s shares were traded on an efficient market that would have incorporated the information into the stock price. The presumption is routinely invoked in securities class actions to justify the grant of class certification.In its petition, Halliburton presented the following two questions: 1. Whether this Court should overrule or substantially modify the holding of Basic Inc. v. Levinson, 485 U.S. 224 (1988), to the extent that it recognizes a presumption of classwide reliance derived from the fraud-on-the-market theory. 2. Whether, in a case where the plaintiff invokes the presumption of reliance to seek class certification, the defendant may rebut the presumption and prevent class certification by introducing evidence that the alleged misrepresentations did not distort the market price of its stock. In granting review, the Court did not limit its consideration to either question. As a result, SCOTUSBlog notes that the Court presumably “at least will consider the broader plea to cast aside the prior ruling.” The case will be argued early next year. Reuters and Bloomberg have coverage of the cert grant. For more on the underlying case and the cert petition, see this recent blog post. Quote of note (Bloomberg): “Four justices — Antonin Scalia, Clarence Thomas, Anthony Kennedy and Samuel Alito — suggested in a ruling in February that they might jettison the ‘Basic presumption,’ as it has become known. The outcome of the case may be in the hands of Chief Justice John Roberts, who usually joins that group in ideologically divisive cases.”

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