Macquarie unit charged with fraud, “took advantage of retail” clients: SEC
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The news: A Macquarie Asset Management unit, Macquarie Investment Management Business Trust (MIMBT), was charged with fraud and will pay USD79.8 million ($117 million) to settle the charges, the US Securities and Exchange Commission said on Thursday.
The charges accuse Macquarie’s unit of inflating the value of about 4,900 “largely illiquid” investments, overstating the performance of some clients’ accounts and of executing hundreds of cross trades between advisory clients that favoured certain clients over others.
The numbers: MIMBT agreed to pay USD70 million in penalties and USD9.8 million in disgorgement and interest, without admitting or denying the SEC’s findings.
The charges stem from overvaluing 4,900 illiquid collateralized mortgage obligations (CMOs) held in 20 advisory accounts, including 11 retail mutual funds, and executing unlawful cross trades favouring certain clients.
The context: The SEC found that between January 2017 and April 2021, MIMBT used institutional pricing for smaller “odd-lot” CMO positions, inflating their value and overstating client account performance.
MIMBT attempted to minimise losses for certain clients by arranging 465 cross trades, transferring the overvalued CMOs to 11 retail mutual funds, leading to losses absorbed by the retail mutual funds.
The firm also executed approximately 175 dealer-interposed cross trades, where it temporarily sold odd-lot CMO positions to third-party broker-dealers and repurchased the same positions for allocation to affiliated client accounts. That way, Macquarie’s trades provided liquidity to redeeming investors in an otherwise illiquid market, often at above-market prices.
Macquarie has agreed to a censure, to cease and desist from further violations, and to an undertaking requiring a comprehensive review of its policies and procedures related to the valuation of CMOs, associated liquidity risks, cross trading, and other matters, as well as to retain a compliance consultant.
What they said: “It is alarming that a fiduciary took advantage of retail mutual funds it advised and executed unlawful cross trades to mitigate its overvaluation of fund assets,” Eric Bustillo, director of the SEC’s Miami regional office, said in a statement.
“Utilizing a third-party pricing service does not negate an investment adviser’s obligation to value assets accurately.”
Macquarie said it will remediate “clients impacted by the valuation and trading activity at issue”.
“Our business is built on the principles of integrity and accountability. This legacy matter is not consistent with how we do business. We have already undertaken and are focused on completing additional remedial steps to address the issues identified in the investigation, with clients the priority,” the company said in a statement.
“We also continue to invest in our risk culture to ensure we discharge our fiduciary duties to the highest standard.”
The sources: SEC statement , SEC cease and desist order , Macquarie statement
