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MutualFundWire.com
The insiders' edge for 40 Act industry executives!
an InvestmentWires' Publication |
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Thursday, August 22, 2013 SEC Attacks, Says This Quant Was Not a Quant Your pants are on fire. The Securities and Exchange Commission leveled charges against a North Carolina-based investment adviser and its former owner for misleading an investment fund’s board of directors about the firm’s ability to conduct algorithmic currency trading so they would approve the firm’s contract to manage the fund, according to a number of news outlets, including Reuters; WSJ and Law360. In the regulator's press release and the complaint itself, the SEC’s Enforcement Division alleges that Chariot Advisors LLC and Elliott L. Shifman misled the fund’s board about the nature, extent, and quality of services that the firm could provide as he touted the competitive benefits of algorithmic trading in two presentations before the board, according to the SEC. However, contrary to what Shifman told the directors, Chariot Advisors did not devise or otherwise possess any algorithms capable of engaging in the currency trading that Shifman was describing. After the fund was launched, Chariot Advisors did not use an algorithm model to perform the fund’s currency trading as represented to the board, but instead hired an individual trader who was allowed to use discretion on trade selection and execution, according to the regulator. The misconduct by Shifman and Chariot Advisors caused misrepresentations and omissions in the Chariot fund’s registration statement and prospectus filed with the SEC and viewed by investors, according to the regulator. “It is critical that investment advisers provide truthful information to the directors of the registered funds they advise,” stated Julie M. Riewe, Co-Chief of SEC Enforcement Division’s Asset Management Unit. “Both boards and advisers have fiduciary duties that must be fulfilled to ensure that a fund’s investors are not harmed.” According to the regulator, the case arose out of an initiative by the SEC Enforcement Division’s Asset Management Unit to focus on the “15(c) process” – a reference to Section 15(c) of the Investment Company Act of 1940 that requires a registered fund’s board to annually evaluate the fund’s advisory agreements. Advisers must provide the board with the truthful information necessary to make that evaluation. In the SEC’s order instituting administrative proceedings, the allegedly false claims by Chariot and Shifman defrauded the Chariot Absolute Return Currency Portfolio, a fund that was formerly within the Northern Lights Variable Trust fund complex. In December 2008 and again in May 2009, Shifman misrepresented to the Chariot fund’s board that his firm would implement the fund’s investment strategy by using a portion of the fund’s assets to engage in algorithmic currency trading. The initial investment objective of the Chariot fund was to achieve absolute positive returns in all market cycles by investing approximately 80 percent of the fund’s assets under management in short-term fixed income securities, and using the remaining 20 percent of the assets under management to engage in algorithmic currency trading. However, Chariot Advisors did not have an algorithm capable of conducting such currency trading, according to the SEC’s order. The ability to conduct currency trading was particularly significant for the Chariot fund’s performance, because in the absence of an operating history the directors focused instead on Chariot Advisors’ reliance on models when the board evaluated the advisory contract. Even though Shifman believed that the fund’s currency trading needed to achieve a 25 to 30 percent return to succeed, Shifman never disclosed to the board that Chariot Advisors had no algorithm or model capable of achieving such a return. Printed from: MFWire.com/story.asp?s=45672 Copyright 2013, InvestmentWires, Inc. All Rights Reserved |