Asset Manager Will Pay $8.8 Million for Failing to Uncover PM’s Illegal Cross-Trading
A large asset manager agreed to pay $8.8 Million in disgorgement, fines and interest for not preventing a portfolio manager from engaging in illegal cross-trading using an interpositioned third-party broker. The SEC charges the PM with arranging de facto cross trades between funds and other clients by using a broker at a third party brokerage firm that bought and sold securities at artificial prices. The SEC alleges that the PM used the broker to avoid legal prohibitions on cross-trades and internal policies. The firm failed to charge the PM with illegal conduct even though the Compliance Department flagged the trading, and the Legal Department conducted an investigation. The SEC charged the firm with securities fraud, breach of fiduciary duty, aiding and abetting securities law violations, and failing to supervise. The SEC also asserts that the firm violated the compliance rule (206(4)-7) by failing to implement its cross-trading policies and adopt policies and procedures against pre-arranged trading. The PM and the Broker also agreed to pay fines and were barred from the industry.
OUR TAKE: Increasingly, firms have strict liability for the bad actions of rogue employees. In this case, the firm had policies and procedures governing cross-trading but failed to stop an employee hell-bent on avoiding those policies by arranging sham trades through a third party. Probably most damaging is that the firm flagged the trading and investigated it, but failed to do more than reprimand the PM.