U.S. securities and derivatives regulators settled charges with a couple of investment firms and portfolio managers for allegedly misleading investors about their funds’ options trading strategy and risk management practices in the years leading up to massive trading losses that caused the funds to collapse.
The U.S. Securities and Exchange Commission (SEC) and the U.S. Commodity Futures Trading Commission (CFTC) announced settlements with Chicago-based advisory firms LJM Funds Management Ltd. and LJM Partners Ltd., along with the firms’ founder, chairman and co-portfolio manager Antony Caine, and another portfolio manager, Anish Parvataneni.
In its complaint in 2021, the SEC alleged that they misled investors by making false and misleading statements about LJM’s “net short” options trading strategy and risk management practices, which they used as advisors to a mutual fund, the LJM Preservation & Growth Fund, and several private investment funds.
The SEC alleged that in the months leading up to an episode of market volatility — which resulted in the funds collectively suffering over US$1 billion in losses in February 2018 and the firms collapsing — the defendants misled investors about the “worst case” daily losses that the strategy could face.
In doing so, the defendants “breached their fiduciary duties and made material misrepresentations relating to the worst-case loss estimates for the LJM managed funds and the funds’ risks,” the regulators alleged.
The alleged misrepresentations allowed the firms to grow their assets under management and generate fees, the SEC said.
Now, the charges have been settled, with the defendants consenting to final judgments, without admitting or denying the SEC’s allegations.
Under the settlements, they must pay a combined $6 million in penalties, disgorgement and interest. Additionally, Caine and Parvataneni were suspended from advising for three years and one year, respectively.