SEC Charges Advisory Firm Macquarie Investment Management Business Trust with Fraud

The Securities and Exchange Commission today announced registered investment adviser Macquarie Investment Management Business Trust (MIMBT) will pay a total of $79.8 million to settle charges for overvaluing approximately 4,900 largely illiquid collateralized mortgage obligations (CMOs) held in 20 advisory accounts, including 11 retail mutual funds, and for executing hundreds of cross trades between advisory clients that favored certain clients over others. According to the SEC’s order, from January 2017 through April 2021, MIMBT managed the Absolute Return Mortgage-Backed Securities strategy, a fixed-income investment strategy primarily invested in mortgage-backed securities, CMOs, and treasury futures. Strategy investments included thousands of smaller-sized, “odd lot” CMO positions that traded at a discount to institutional, larger-sized positions. MIMBT valued the odd lot CMOs using prices obtained from a third-party pricing service that were intended for institutional lots only. The pricing service did not provide separate valuations for odd lots. The order finds that MIMBT had no reasonable basis to believe it could sell the odd lot CMOs at the pricing vendor’s valuations, and thousands of odd lot CMO positions were marked at inflated prices. This resulted in MIMBT overstating the performance of client accounts holding the overvalued CMOs. The order further finds that MIMBT attempted to minimize losses to redeeming investors by arranging cross trades with affiliated accounts, rather than selling the overvalued CMOs into the market. In one instance, MIMBT executed 465 internal cross trades between a selling account and 11 retail mutual funds above independent current market prices. These trades resulted in the retail mutual funds absorbing losses that otherwise would have been borne by the selling account in a market sale. MIMBT also arranged for approximately 175 dealer-interposed cross trades in which MIMBT temporarily sold odd lot CMO positions to third-party broker-dealers and then repurchased those same positions for allocation to one or more affiliated client accounts, providing liquidity to redeeming investors in an otherwise illiquid market, often at above-market prices. “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,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office. “Utilizing a third-party pricing service does not negate an investment adviser’s obligation to value assets accurately.” The SEC’s order finds that MIMBT violated the antifraud and compliance provisions of the Investment Advisers Act of 1940, and certain provisions of the Investment Company Act of 1940. Without admitting or denying the SEC’s findings, MIMBT agreed to a censure, to cease and desist from further violations of the charged provisions, and to pay a $70 million penalty and disgorgement and prejudgment interest, totaling an additional $9.8 million. MIMBT also agreed to comply with certain undertakings, including retaining a compliance consultant to conduct a comprehensive review of its policies and procedures relating to, among other things, valuation of CMOs and associated liquidity risks, and cross trading. The SEC’s ongoing investigation is being conducted by Christine Lynch and Crystal Ivory, under the supervision of Jessica M. Weissman, Fernando Torres, and Glenn S. Gordon, of the SEC’s Miami Regional Office.

The Securities and Exchange Commission today announced registered investment adviser Macquarie Investment Management Business Trust (MIMBT) will pay a total of $79.8 million to settle charges for overvaluing approximately 4,900 largely illiquid collateralized mortgage obligations (CMOs) held in 20 advisory accounts, including 11 retail mutual funds, and for executing hundreds of cross trades between advisory clients that favored certain clients over others. According to the SEC’s order, from January 2017 through April 2021, MIMBT managed the Absolute Return Mortgage-Backed Securities strategy, a fixed-income investment strategy primarily invested in mortgage-backed securities, CMOs, and treasury futures. Strategy investments included thousands of smaller-sized, “odd lot” CMO positions that traded at a discount to institutional, larger-sized positions. MIMBT valued the odd lot CMOs using prices obtained from a third-party pricing service that were intended for institutional lots only. The pricing service did not provide separate valuations for odd lots. The order finds that MIMBT had no reasonable basis to believe it could sell the odd lot CMOs at the pricing vendor’s valuations, and thousands of odd lot CMO positions were marked at inflated prices. This resulted in MIMBT overstating the performance of client accounts holding the overvalued CMOs. The order further finds that MIMBT attempted to minimize losses to redeeming investors by arranging cross trades with affiliated accounts, rather than selling the overvalued CMOs into the market. In one instance, MIMBT executed 465 internal cross trades between a selling account and 11 retail mutual funds above independent current market prices. These trades resulted in the retail mutual funds absorbing losses that otherwise would have been borne by the selling account in a market sale. MIMBT also arranged for approximately 175 dealer-interposed cross trades in which MIMBT temporarily sold odd lot CMO positions to third-party broker-dealers and then repurchased those same positions for allocation to one or more affiliated client accounts, providing liquidity to redeeming investors in an otherwise illiquid market, often at above-market prices. “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,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office. “Utilizing a third-party pricing service does not negate an investment adviser’s obligation to value assets accurately.” The SEC’s order finds that MIMBT violated the antifraud and compliance provisions of the Investment Advisers Act of 1940, and certain provisions of the Investment Company Act of 1940. Without admitting or denying the SEC’s findings, MIMBT agreed to a censure, to cease and desist from further violations of the charged provisions, and to pay a $70 million penalty and disgorgement and prejudgment interest, totaling an additional $9.8 million. MIMBT also agreed to comply with certain undertakings, including retaining a compliance consultant to conduct a comprehensive review of its policies and procedures relating to, among other things, valuation of CMOs and associated liquidity risks, and cross trading. The SEC’s ongoing investigation is being conducted by Christine Lynch and Crystal Ivory, under the supervision of Jessica M. Weissman, Fernando Torres, and Glenn S. Gordon, of the SEC’s Miami Regional Office.