U.S. securities and derivatives regulators brought charges against a portfolio manager and an advisory firm for allegedly misrepresenting the risk management practices employed by a hedge fund that suffered hundred of millions of dollars in losses.
Both the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) announced charges against Catalyst Capital Advisors LLC (CCA), its president and CEO, Jerry Szilagyi, and portfolio manager Edward Walczak.
According to the SEC’s order against Catalyst and Szilagyi, CCA’s hedge fund breached its purported risk parameters and failed to take the required corrective action, losing about 20% of its value as a result.
The SEC and CFTC settled with the firm and Szilagyi, who agreed to pay a combined US$10.5 million to settle allegations that they misled investors about the risk management practices of the fund.
They neither admitted to nor denied the charges in settling with the regulators.
The regulators also filed a complaint in federal district court against Walczak, alleging that he misrepresented measures he would take to manage risk for the fund. Those allegations have not been proven.
“The complaint alleges that Walczak routinely failed to hedge in the manner he said he did, ultimately resulting in at least US$500 million of investor losses,” the CFTC noted.
The regulators are seeking penalties, disgorgement and registration bans against Walczak.
“Fund managers must be truthful and transparent when describing their risk management procedures,” said Dabney O’Riordan, co-chief of the SEC enforcement division’s asset management unit.