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White Collar Crime - Investment Advisors

Making false statements to fund trustees leads to charges.

SEC charges money market fund adviser and portfolio manager with violations of the federal securities laws

December 6 2013. lexology.com

On November 26, 2013, the SEC filed an order instituting administrative and cease-and-desist proceedings against Ambassador Capital Management (ACM), a Detroit-based investment adviser, and Derek Oglesby, a portfolio manager, alleging that ACM and Mr. Oglesby made false statements to the trustees of the Ambassador Money Market Fund and failed to comply with rules limiting the risk of the fund’s portfolio. The SEC’s order alleges that ACM and Mr. Oglesby repeatedly made false statements to the trustees of the fund about the credit risk of the securities purchased for the fund’s portfolio, including misleading statements about the fund’s exposure to the Eurozone credit crisis of 2011. The SEC claims that, in 2011, Mr. Oglesby informed the trustees that ACM was seeking to avoid exposure to the Italian market while the fund actually purchased securities issued by Italian affiliated entities.

The SEC’s order also alleges that ACM caused the fund to deviate from the risk limiting provisions of Rule 2a-7 under the 1940 Act applicable to money market funds. A money market fund must make a determination that its portfolio securities present minimal credit risk; however, the SEC states that ACM’s credit analyses from 2009 to 2011 often failed to include such minimal credit risk determinations. The SEC’s order also includes allegations that ACM caused the fund to exceed the 5% issuer diversification limit of Rule 2a-7 and that ACM failed to comply with the stress testing provisions of Rule 2a-7. The SEC claims that because ACM failed to follow the risk-limiting provisions of Rule 2a-7, the fund was not permitted to use the amortized cost method of valuing securities under which it priced its securities at $1 per share and should not have been held out as a money market fund.

The SEC’s order alleges that the conduct and misrepresentations by ACM and Mr. Oglesby resulted in violations of Section 206(1) and (2) of the Advisers Act, Sections 31 (a), 34(b) and 35(d) of the 1940 Act and Rules 2a-7, 22c-1 and 38a-1 thereunder. The enforcement action stemmed from a review of money market fund data conducted by the SEC’s Division of Investment Management’s Risk and Examinations Office (REO). REO’s analysis found that the gross yield of the fund, a marker of a fund’s risk, was consistently significantly higher than that of other peer money market funds.

 

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