The Securities and Exchange Commission (SEC) has instructed Macquarie Investment Management Business Trust (MIMBT) to pay nearly $80 million for fraudulent behavior.
The SEC has found MIMBT guilty of antifraud and compliance provisions of the Investment Advisers Act of 1940 and parts of the Investment Company Act of 1940.
“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.”
MIMBT found guilty of antifraud breaches
The advisory firm was found to be in breach of multiple statutes by the investigation, which is still ongoing by the SEC Miami Regional Field Office.
According to the report, 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.” These comprised of thousands of smaller-sized CMO positions that traded at a reduced price to larger-sized positions in the market.
MIMBT valued the odd lot CMOs using software that did not provide separate valuations for them. They used this aggregated figure, which the SEC found was inflated and sold at these marked-up prices. The investigation found that this resulted in MIMBT “overstating the performance of client accounts holding the overvalued CMOs,” and gaining the ire of the government regulator in the process.
The SEC investigation also found that 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.”
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