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.
“Compliance with the risk-limiting provisions is critically important for a money market fund. Deviations can have serious consequences for pricing of fund shares and how the fund markets itself to investors,” said Marshall S. Sprung, co-chief of the SEC Enforcement Division’s Asset Management Unit.
The SEC’s order alleges that Ambassador Capital Management violated the antifraud provisions of the Investment Advisers Act of 1940 and Oglesby aided and abetted the firm’s violations. They allegedly caused violations of the pricing, naming, and recordkeeping provisions of the Investment Company Act, and the firm caused violations of the compliance provision.
The SEC’s investigation was conducted by Amy Stahl Cotter and John J. Sikora Jr. of the Asset Management Unit in the Chicago Regional Office with assistance from Marita Bartolini of the Office of Compliance Inspections and Examinations. The SEC’s litigation will be led by Jonathan S. Polish, Robert Moye, and Timothy S. Leiman.
The Division of Investment Management's Risk and Examinations Office monitors trends in the asset management industry and utilizes the data to inform policy and evaluate potential rulemaking. The office interacts with registrants through an inspection and examination program. Its ongoing quantitative and qualitative analysis of the asset management industry played a vital role in this enforcement action. “This is an excellent example of how our investment in data analysis leads directly to investor protection,” said Norm Champ, director of the SEC’s Division of Investment Management. “With a team of specialists who understand these products working alongside financial analysts, we can produce solid information for examination and enforcement use.”