by T. GormanPosted on Posted in SECActions

The SEC brought its first proceeding under Rule 38a-1(c) of the Investment Company Act. That Rule prohibits an officer, director or employee of a fund or its investment adviser from taking any action to coerce, manipulate, mislead or fraudulently influence the CCO of the fund. Here, the Order alleges that Respondent mislead the Chief Compliance Officer of the funds in an effort to conceal his violation of rules and procedures requiring that he disclose his securities transactions. In the Matter of Carl D. Johns, Adm. Proc. File No. 3-15440 (Filed August 27, 2013).

Respondent Carl Johns was employed by Bolder Investment Advisers, LLC. He also performed services for its affiliate, Boulder Investment Advisers, LLC. The two advisers provided investment advisory services to four affiliated, closed-ended management investment companies registered with the Commission. Mr. Johns assisted in the management of the portfolios for, and served as an officer of, several registered investment companies.

During the course of his employment Mr. Johns engaged in active personal trading in securities, including those held by the funds. Rule 17j-1(d) of the Investment Company Act required that Mr. Johns submit quarterly reports of his personal transactions and annual reports of his holdings. The Code of Ethics of the advisers imposed additional restrictions regarding pre-clearance and trading. It also required an annual certification.

From 2006 through 2010 Mr. Johns failed to comply with Rule 17j-1(d) and the Code of Ethics. He failed to clear 640 trades, including 91 transactions in securities held, or to be acquired by, the funds. To conceal these violations Mr. Johns submitted false quarterly and annual reports and certifications. Specifically, he altered brokerage statements and trade confirmations; created documents claiming to show pre-clearance approval which were false; submitted altered confirmations in an effort to make it appear he had obtained pre-clearance; and deleted securities holding on his brokerage statements.

In late 2010 the CCO raised questions about the documents submitted by Mr. Johns. When questioned, Mr. Johns mislead the COO, falsely claiming that certain brokerage accounts were closed. He also accessed previously submitted documents regarding his trading and altered them in a manner designed to demonstrate compliance. The Order alleges violations of Section 17(j) of the Investment Company Act and Rules 17j-1 and 38a-1.

To resolve the proceeding Mr. Johns consented to the entry of a cease and desist order based on the Sections and Rules cited in the complaint. In addition, he agreed to the entry of an order barring him from the securities business with a right to apply for reentry after five years and agreed to pay disgorgement of $231,169 along with prejudgment interest and a civil money penalty of $100,000. Cf. SEC v. Gray, Civil Action No. 4:13-cv-2186 (S.D.Tx. Filed July 26, 2013)(CEO of IR firm settles action charging that he engaged in insider trading in stocks of firm clients).

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by T. GormanPosted on Posted in SECActions

An investment adviser and its founder, who persuaded a management investment company to create a fund based on a specified investment strategy, were charged with fraud in a proceeding initiated by the SEC. The proposed investment strategy for the fund was presented to the board of directors by Respondents and described in filings made with the Commission. The adviser, however, lacked the ability to implement that strategy. In the Matter of Chariot Advisors, LLC, Adm. Proc. File No. 3-15433 (Aug. 21, 2013).

Respondent Chariot Advisors has been a registered investment adviser since September 2008 when it was founded by sole owner and Respondent, Elliott Shifman. Shortly after founding Chariot Advisors, Mr. Shifman began developing the Chariot Fund. It had an investment objective of achieving absolute positive returns in all market cycles by investing about 80% of the assets under management in short-term fixed income securities while using about 20% of the assets to engage in algorithmic currency trading. That strategy was based on Mr. Shifman’s theory that there were short term inefficiencies in the currency markets which could be exploited.

In late November 2008 Mr. Shifman approached Northern Lights, a registered open-ended series management investment company, with a proposal to create a series based on the Chariot Fund investment strategy. Mr. Shifman provided the Northern Lights with materials which detailed the strategy. He followed-up by making a presentation to the board of directors which largely reiterated the representations in the materials. Based on those representations, the board approved the Chariot Fund as a series of Northern Lights. The investment strategy was to be the fixed income/algorithmic currency trading approach crafted by Mr. Shifman for the fund.

Subsequently, Mr. Shifman entered into talks to sell the fund. Pending a possible change in control the board of Northern Lights requested a second submission. Respondents submitted papers which largely reiterated the fixed income/algorithmic currency trading approach but requested an increased management fee. The papers submitted contained a proposed prospectus which described the proposed investment strategy.

Again the board approved the proposal. A registration statement on Form N-1A was filed with the Commission in June 2009 which described the fixed income/algorithmic currency trading strategy. The registration statement became effective at the end of the month. The fund launched in July 2009.

Control of the fund changed at the end of June 2009 when the registration statement became effective. For the first two months of operation a trader retained by Mr. Shifman directed trading. That person did not use an algorithm. Rather, as Mr. Shifman knew when hiring the trader, she utilized a technical analysis, rules-based approached along with certain market indicators and intuition. Indeed, the fund never had the ability to implement the fixed income/algorithmic approach approved by the board and described in the prospectus and registration statement, according to the Order.

The Order alleges that Chariot Advisors willfully violated Section 15(c) of the Investment Company Act. That Section imposes a duty on an investment adviser to a registered investment company to furnish the information to the board which may be reasonably necessary to approve the contract for the adviser. Respondents also willfully aided and abetted and caused the Chariot Fund’s violations of Investment Company Act Section 34(b). That Section precludes making an untrue statement of a material fact in any registration statement or other document filed or transmitted pursuant to the Investment Company Act. In addition, Chariot Advisers willfully violates Advisers Act Sections 206(1), (2) and (4) while Mr. Shifman willfully aided and abetted and caused Chariot Advisor’s violations of Sections 206(1) and (2), according to the Order. The proceeding will be set for hearing.

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