Investment Adviser Roundup: Two Firms Pay Over $47M For Alleged Failure to Properly Disclose Allegations, District Court Allows Claims Involving Excessive Mutual Fund Fees, and Conn. Firm to Settle CDO Misrepresentation Allegations for $1.62M

Investment Advisory Firms Settle SEC’s Failure to Disclose Mutual Fund Risk Allegations for Over $47M
Claymore Advisors LLC and Fiduciary Asset Management LLC have agreed to pay over $47 million to settle SEC proceedings related to the roles that they allegedly played in failing to properly disclose the risky derivative strategies of a closed-end mutual fund. The strategies are partially to be blame for the collapse of the
Fiduciary/Claymore Dynamic Equity Fund (HCE) during the economic crisis. The two firms are resolving the claims without denying or admitting to wrongdoing, and some of the money will go toward reimbursing shareholders.

However, the securities case will proceed against two of the fund’s portfolio managers, Timothy Swanson and Mohammed Riad. The two of them allegedly made misrepresentations about the way the strategies contributed to the fund’s performance and about fund exposure to downside risk. (Allegedly, the two strategies HCE had implemented to improve returns actually upped risk exposure and resulted in over $45M in losses over two months in 2008. In 2009, the fund liquidated.

Hartford Investment Financial Services LLC Must Face Claims Over Excessive Mutual Fund Fee Charges
The U.S. District Court for the District of New Jersey says that Hartford Investment Financial Services LLC (HIFSCO) must contend with some of the claims in a securities lawsuit accusing the investment advisory concern of charging excessive fees to mutual funds. The plaintiffs, who filed the securities fraud lawsuit for several mutual funds, claim that the unreasonable fees violate the 1940 Investment Company Act Section 36(b).

Pointing out that per relevant case law, an investment adviser has to charge a fee “so disproportionately large” it has no reasonable relationship bearing to the services issued and could not have been the result of “arm’s length bargaining” for liability to be faced under Section 36(b), the district court, which had partially dismissed a previous version of this securities complaint, said that if, per the plaintiffs’ allegations, HIFSCO charges about three times the cost to provide investment management services, then plaintiffs have brought up plausible inference that the fees are excessive under Section 36(b). The court therefore denied HIFSCO’s motion to dismiss Count I in the latest version of this securities case but granted dismissal of its motion related to Count II, which accuses the investment advisory concern of charging excessive 12b-1 fees to certain of the funds’ shareholders.

Aladdin Capital Management to Settle Allegations it Misrepresented CDO Co-Investments with $1.62M Settlement
Without denying or admitting wrongdoing, Aladdin Capital Management LLC will pay about $1.62 million to settle SEC allegations that it told clients it had “skin-in-the-game” and was co-investing along with them in two collateralized debt obligations. This supposed co-investment was a key selling feature of its Multiple Asset Securitized Tranche, which was an advisory program involving collateralized loan obligations and CDOs. Marketing collateral touted this selling point for why to invest in CDOs and CLOs that were sponsored by Aladdin. Yet in truth, contends the SEC, the investment adviser was not co-invested in either CDO.

Aladdin Capital LLC, an Aladdin Capital Management affiliate, and ex-principal Joseph Schlim also settled related allegations.

In re Claymore Advisors LLC, SEC (PDF)

Kasilag v. Hartford Investment Financial Services (PDF)

In re Aladdin Capital Management LLC, SEC (PDF)

More Blog Posts:
District Court in Texas Dismisses Securities Fraud Case Against Sports Franchisor, Stockbroker Fraud Blog, December 15, 2012

SEC Intends to Examine 25% of Investment Advisers That Had To Register, Per Dodd-Frank Act, by End of 2014, Stockbroker Fraud Blog, December 26, 2012

GAO Says Most Financial Regulators Don’t Have the Procedures/Policies to Coordinate Dodd-Frank Rules, Institutional Investor Securities Blog, December 24, 2012