Macquarie Asset Management must pay nearly $80 million in SEC fraud charges

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The SEC charged the firm with fraud for overvaluing approximately 4,900 largely illiquid collateralized mortgage obligations (CMOs) held in 20 advisory accounts, including 11 retail mutual funds, and for conducting cross-trades between advisory clients that favored certain clients .

According to the SEC, from January 2017 to April 2021, MIMBT managed the Absolute Return Mortgage-Backed Securities strategy, a fixed income investment strategy that invests primarily in mortgage-backed securities, CMOs, and Treasury futures. In hers opinionMacquarie Asset Management reports that this strategy is now being discontinued.

The SEC alleges that the strategy’s investments included thousands of smaller “odd lot” CMO positions that traded at a discount to larger institutional positions. MIMBT evaluated the CMOs with odd lots using prices obtained from a third-party pricing service intended only for institutional lots and did not provide separate ratings for odd lots.

The SEC’s order found that MIMBT had no reasonable belief that it could sell the odd-lot CMOs at the pricing provider’s valuations and that thousands of odd-lot CMO positions were priced at inflated prices, resulting in that the performance of the customer accounts that the overvalued CMOs held were overstated.

Additionally, the SEC found that MIMBT attempted to minimize losses by arranging cross-trades with affiliated accounts rather than selling the CMOs. According to the SEC, this caused the retail mutual funds to absorb losses that otherwise would have been borne by the sales account in a market sale.

The SEC’s order finds that MIMBT violated the anti-fraud and compliance provisions of the Investment Advisers Act of 1940 and certain provisions of the Investment Company Act of 1940. MIMBT states that it has agreed to pay the civil penalty to complete the SEC’s investigation without admitting or denying its findings. The company claims it will provide redress to customers affected by the investigation.

MIMBT also agreed to comply with other measures, including engaging a compliance consultant to conduct a comprehensive review of its policies and procedures relating to, among other things, the assessment of CMOs and related liquidity risks and cross-trading.

“It is alarming that a fiduciary exploited retail mutual funds he advised and conducted unlawful cross-trades to mitigate the overvaluation of the fund’s assets,” said Eric I. Bustillo, director of the SEC’s Miami Regional Office. “Using a third-party pricing service does not relieve an investment advisor of their obligation to accurately value assets.”

Macquarie Asset Management commented: “Our business is based on the principles of integrity and accountability. This legacy issue is not consistent with the way we do business. We have already taken additional remedial action and are focused on addressing the issues identified in the investigation, with customers at the forefront. We continue to invest in our risk culture to ensure we meet our fiduciary duties at the highest levels.”