SEC Charges Mutual Fund Executives with Misleading Investors Regarding Investment Risks in Funds That Suffered $1 Billion Trading Loss
SEC vs. LJM Funds Management, Ltd. and LJM Partners, Ltd. et al. (No. 1:21-Cv-02859 (D. Nd IIIinois. Filed May 27, 2021)
Litigation Release no. 25101 / May 28, 2021
The Securities and Exchange Commission filed a civil action alleging that investment advisers LJM Funds Management, Ltd. and LJM Partners, Ltd. and their portfolio managers, Anthony Caine and Anish Parvataneni, fraudulently misled investors and the board of directors of a fund they advised about LJM's risk management practices and the level of risk in LJM's portfolios. The SEC separately settled related charges with LJM's Chief Risk Officer, Arjuna Ariathurai.
According to the SEC's complaint, LJM adopted a short volatility trading strategy that carried risks that were remote but extreme. The complaint alleges that, in order to ease investor concerns about the potential for losses, LJM, Caine and Parvataneni made a series of misstatements to investors and the mutual fund's board about LJM's risk management practices, including false statements about its use of historical event stress testing and its commitment to maintaining a consistent risk profile instead of prioritizing returns. The complaint further alleges that, beginning in late 2017, during a period of historically low volatility, LJM, Caine, and Parvataneni increased the level of risk in the portfolios in order to chase return targets, while falsely assuring investors that the portfolios' risk profiles remained stable. According to the complaint, in February 2018, the markets suffered a large spike in volatility, resulting in catastrophic trading losses exceeding $1 billion, or more than 80% of the value of the funds LJM managed, over two trading days.
The complaint charges the defendants with violating Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, Sections 206(1), 206(2), and 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder, and Sections 15(c) and 34(b) of the Investment Company Act, and seeks permanent injunctions, disgorgement with prejudgment interest, and civil penalties.
In related proceedings, the SEC also instituted settled administrative and cease-and-desist proceedings against Ariathurai, who agreed, without admitting or denying the SEC's findings, to an associational bar with a right to apply for reentry after three years, disgorgement and prejudgment interest of $97,444, and a civil penalty of $150,000.
In parallel actions, the Commodity Futures Trading Commission announced charges against LJM Funds Management, Ltd., LJM Partners, Ltd., Caine, Parvataneni, and Ariathurai.
The SEC's investigation was conducted by Marlene Key-Patterson, Jake Schmidt, Kevin Wisniewski, Terry Moran, and Sara Renardo and was supervised by Jeffrey Shank. The SEC's examination was conducted by Max Gillman, Daniel Brinks, Brandi Hodges, David Mueller, and Kent McAllister. Michael Foster and Robert Moye will lead the litigation. The SEC appreciates the assistance of the CFTC.