SEC Charges N.Y.-Based Money Manager and Firm for Misleading Advertisements
The Securities and Exchange Commission today charged a New York-based money manager and his firm with making false claims through Twitter, newsletters, and other communications about the success of their investment advice and a mutual fund they manage.
An SEC order against Mark A. Grimaldi and Navigator Money Management (NMM) finds that they selectively touted the past performance of the Sector Rotation Fund (NAVFX) and specific securities recommendations they made to clients. They cherry-picked highlights but ignored less favorable recommendations and other data that would have made the facts complete.
Grimaldi and NMM agreed to settle the SEC’s charges.
“The securities laws require investment advisers to be honest and fully forthcoming in their advertising to give investors the full picture,” said Sanjay Wadhwa, senior associate director for enforcement in the SEC’s New York Regional Office. “Grimaldi and his firm are being held accountable for using social media and widely disseminated newsletters to cherry-pick information and make misleading claims about their success in an effort to attract more business.”
According to the SEC’s order, Grimaldi is majority owner, president, and chief compliance officer at NMM, which is based in Wappingers Falls, N.Y. Grimaldi particularly used a newsletter called The Money Navigator to solicit clients for NMM and investors for the Sector Rotation Fund. The Money Navigator had more than 60,000 subscribers. In 2008, the SEC conducted an examination of NMM and a fund it managed. SEC exam staff notified NMM that the newsletters could be considered advertisements under Rule 206(4)-1, which generally prohibits false or misleading advertisements by investment advisers. SEC staff also noted that the newsletters could be considered advertisements under Rule 482, which governs advertisements for mutual funds and other investment companies and has specific requirements for ads containing performance data.
The SEC’s order details several misleading advertisements made by NMM and Grimaldi in newsletters following that SEC examination. For example, they misleadingly claimed in a December 2011 newsletter that Sector Rotation Fund was “ranked number 1 out of 375 World Allocation funds tracked by Morningstar.” However, a time period of Oct. 13, 2010 to Oct. 12, 2011 was cherry-picked to broadly acclaim that ranking, and Sector Rotation Fund had a poorer relative performance during other time periods. From Jan. 1 to Nov. 30, 2011, the day before Grimaldi published the ad, at least 100 other mutual funds in that same Morningstar category outperformed Sector Rotation Fund.
According to the SEC’s order, NMM was advertised as a “five-star (Morningstar) money manager” in the newsletters as well as on websites and in e-mail correspondence with potential investors. This claim was materially misleading because Morningstar rates mutual funds not investment advisers. And since February 2009, NMM has not been the investment manager of any mutual fund rated five stars by Morningstar.
The SEC’s order finds that Grimaldi also made misleading statements on Twitter. He claimed responsibility for model portfolios in his newsletters that “doubled the S&P 500 the last 10 years.” However, Grimaldi made the claim even though he had no involvement in the model portfolio performance for the first three years.
The SEC’s order finds that NMM violated Sections 17(a) of the Securities Act of 1933, Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rules 206(4)-1(a)(2), 206(4)-1(a)(5), 206(4)-7, and 206(4)-8 as well as Section 34(b) of the Investment Company Act of 1940. Grimaldi violated many of the same provisions and aided and abetted and caused NMM’s violations.
Grimaldi agreed to pay a penalty of $100,000, and he and the firm agreed to be censured and comply with certain undertakings including the retention of an independent compliance consultant for three years. Without admitting or denying the SEC’s findings, NMM and Grimaldi are required to cease and desist from future violations of these sections of the securities laws.
The SEC’s investigation was conducted by Wendy Tepperman, Mark Germann, and Alexander Janghorbani of the New York office with assistance from Nell Spekman, an examiner in the New York office.