The SEC obtained summary judgment against a manager that chose to litigate rather than settle with the SEC over charges that it sold a model that advertised misleading performance that the defendant failed to confirm. The court rejected the defendant’s selective enforcement defense because the SEC brought several cases against other similarly-situated firms. The SEC accuses the defendant and its principal with continuing to market the misleading model even after knowing that the advertised performance was misleading and backtested. The defendant then sold that portion of its business to the model provider without further disclosure. The defendant’s Chief Compliance Officer identified red flags in the models but recommended offering the models without verifying performance because another third party had purportedly conducted due diligence and other advisers were selling the model.
You can’t beat the SEC. The SEC hardly ever loses administrative actions and wins 2/3 of federal court cases. If you do decide to litigate, Constitutional challenges to administrative actions hardly ever succeed. This case also shows the dangers of hiring an internal Chief Compliance Officer beholden to management. The CCO here identified the red flags but signed off on marketing the models anyway.