Case Study: SEC v. Macquarie Investment Management Business Trust
Table of Content
Background
Legal Issues
Case Outcome
Broader Implications
Key Takeaways
References & Resources
Background
Industry Context
- Brokerage firms base their business model on the premise of trust. While investors place value on the advice provided by these financial intermediaries.
Unfortunately, not all investors conduct due diligence when it comes to selecting investments or brokers, placing a vast amount of trust in the system and the people who make it all happen.
Company Details
- Macquarie Group Limited is an Australian based financial services provider with a global presence operating in 34 markets. With 55 years of unbroken profitability, they manage assets to the value of $A916.8 billion. Their common stock trades on the Australian Securities Exchange.
- Delaware basedMacquarie Investment Management Business Trust (“MIMBT”) is a statutory trust. Their principal place of business is in Philadelphia, Pennsylvania.
- MIMBT has been registered with the SEC since May 31, 1988.
- They provide investment advisory services and, as of June 2024, managed approximately $191 billion in assets.
Key Events Leading to the Case
During the period, January 2017 to April 2021, MIMBT managed fixed-income investment strategies that invested in collateralized mortgage obligations, mortgage-backed securities and Treasury futures. Their conduct snowballed to the following:
- They executed hundreds of cross-trades between advisory clients, with selected favoritism over certain clients.
- Attempts were made to redeem investors by arranging cross-trade with affiliated accounts, as an overall means of minimizing losses.
- The company overvalued approximately 4,900 collateralized mortgage obligations (CMOs) held in 20 advisory accounts.
- 465 internal cross-trades were executed between a Selling Account and 11 Retail Mutual Funds. These trades were priced above market prices.
- Over 1,000 odd lots of CMO positions were marked at inflated prices.
Legal Issues
Allegations/Claims/Violations
After a comprehensive investigation, MIMBT was found able of the following:
- Advising and executing unlawful cross trades to mitigate overvaluation of fund assets.
- Providing liquidity in an otherwise illiquid market.
- Not valuing assets accurately.
- Violating certain anti-fraud and compliance provisions of the following Acts:
- Section 206 [80b-6] of the Investment Advisors Act of 1940 – “It shall be unlawful for any investment advisor, by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly –
(2) to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client;” - The Investment Company Act of 1940 – Which places great emphasis on proper disclosure to the investing party, ensuring required information is distributed about the fund, investment, structure, objectives and operations.
- Section 206 [80b-6] of the Investment Advisors Act of 1940 – “It shall be unlawful for any investment advisor, by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly –
Case Outcome
Settlement
Judgement in this matter was issued as follows against MIMBT:
- A penalty of $70 million.
- Disgorgement and prejudgment interest payable to the value of $9.8 million.
- Agreement to cease and desist.
- Retention of the services of a Compliance Consultant – specifically to evaluate policies and procedures related to the valuation of the CMO, cross trading, and associated liquidity risks.
Broader Implications
For the Financial Industry
The judgment against MIMBT had a knock-on effect on the whole financial industry. It made individual investors wary about product offerings and brokerage services. Conversely, it also planted the seed for greater industry transparency about financial products and brokerage services.
Regulatory Trends
US laws and regulations dictate the conduct of investment firms, with the SEC acting as the “governing body”. It has become commonplace for them to conduct regular investigations and compliance audits to determine whether the overall company and management conduct complied with federal securities laws. These types of investigations have started to increase in frequency, to safeguard the investor.
Key Takeaways
Lessons Learned
- Overvaluation is a serious problem in the investment industry, and trying to mitigate this with a form of related cross-trading leaves a sour taste in the mouth.
- Transparency and honesty in all forms of business activities and related communication systems is essential, especially in the financial industry.
- Compliance with relevant legislative and regulatory requirements is a key operational requirement for any investment company, adviser, or broker.
References & Resources
- SEC Press Release: SEC.gov | SEC Charges Advisory Firm Macquarie Investment Management Business Trust with Fraud.
- Direct Case Link: www.sec.gov/files/litigation/admin/2024/ia-6709.pdf.
- www.macquarie.com/au/en.html.
- SEC Fines Macquarie Investment Management $80 Million to Settle CMO Charges | Morningstar.
- Macquarie unit to pay nearly $80 million to settle SEC charges.
- Macquarie Unit Settles SEC Fraud Allegations for $79.8 Million.
- www.govinfo.gov/content/pkg/COMPS-1878/pdf/COMPS-1878/pdf.
- Investment Company Act of 1940 (ICA) | Practical Law.
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