by T. GormanPosted on Posted in SECActions

Alternative investment manager Nikolai Battoo appeared to be the all-American success story. He began as a Florida cook and rose to manage over a billion dollars in assets. He attracted investments from investors across the globe. He claimed to have successfully navigated the financial crisis and Madoff. Unfortunately for his investors, at this juncture he only appears to attract law suits. Both the SEC and the CFTC have brought enforcement actions. See SEC v. Battoo, Civil Action No. 12 C 7125 (N.D. Ill.); CFTC v. Battoo, Civil Action No. 12 C 7127 (N.D. Ill.); see also In the Matter of Larry C. Grossman, Adm. Proc. File No. 3-15617 (Nov. 20, 2013).

The SEC added to the list, filing SEC v. Brown, Civil Action No. 1:14-cv-06130 (N.D. Ill. Filed August 8, 2014). That action names as defendants Alliance Investment Management Limited, or AIM, a Bahamian broker dealer registered with the SEC, and its president, Julian R. Brown. At its center is former cook and investment management star, Nikolai Battoo.

Mr. Battoo was a principal of BC Capital Group S.A. and BC Capital Group Limited. He also controlled and served as the investment adviser to several hedge fund families and for PIWM, a brand name under which he managed a number of portfolios. At his peak Mr. Battoo claimed to have about $1.5 billion under management.

From about 2004 through the fall of 2012 Mr. Battoo represented to investors that he was a highly successful asset manager. During the period he raised over $400 million from investors in several countries. He claimed to manage over $200 million for the benefit of U.S. investors.

Under the PIWM trade name Mr. Battoo managed a variety of programs called mandates, a type of pooled investment vehicle. The investment programs appeared to be successful. Even through the market crisis Mr. Battoo claimed that the PIWM program was successful.

Investors later learned it was not. The PIWM program suffered significant losses during the period. Beginning in 2005 Mr. Battoo participated in a fund-linked certificate program through an international bank, investing about $130 million. In 2008 the investment was wiped out. In December of that year his management business suffered another significant blow. Several of the hedge funds he managed were heavily invested in the Madoff Ponzi scheme. More heavy losses.

Rather than tell investors the truth, Mr. Battoo lied to them. While he recovered some of the losses from the fund-linked certificate program, investors were never told about the losses. He denied that the Madoff debacle had have any significant impact on his investment program. Investors were furnished with false account statements recording bogus investment returns.

Mr. Brown and AIM directly participated in, and substantially assisted, Mr. Battoo’s fraud. Throughout the period AIM represented that it was the independent custodian for PIWM investments. The custodian was supposed to safeguard the investments. In fact, after receiving investor proceeds AIM did not retain custody of them. Rather, at the direction of Mr. Battoo, the assets were forwarded to him. This facilitated in the misappropriation of over $45 million, according to the complaint.

AIM was supposed to send account statements to investors. Those statements would assure investors that the custodian was protecting them. Preparation of the statements was problematic since the assets had been returned to Mr. Battoo. To solve this problem Mr. Battoo was furnished with blank AIM letterhead so that he could create the account statements. The Battoo account statements, which vastly overstated the value of the accounts, were then distributed to investors by Mr. Brown under a letter bearing his signature.

Mr. Brown and AIM profited from their work with Mr. Battoo. About $5 million was placed with the firm as a so-called investment by Mr. Battoo. In addition, Mr. Brown and AIM were paid significant fees. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation.

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by T. GormanPosted on Posted in SECActions

The SEC’s nationwide review of municipal bond disclosures yielded another enforcement action, this time against the state of Kanas. The Order centers on claims that the state failed to disclose its huge unfunded pension liabilities. In the Matter of The State of Kansas, Adm. Proc. File No. 3-16009 (Aug. 11, 2104).

Beginning in August 2009, and continuing for about the next year, the Kansas Development Finance Authority or KDFA raised $273 million through eight series of bonds offered on behalf of the State and its agencies. KDFA is an independent instrumentality of the state. Its primary purpose is to enhance the ability of the state to finance capital improvements. As a conduit issuer, the instrumentality offers securities on behalf of underlying issuers. KDA, another component of the state, provided all financial and administrative services for it. Through two separate divisions it provided disclosure documents and comprehensive annual financial reports or CAFRs.

The pension fund in the state, KPERS, is an independent instrumentality. It covers most government and public service employees. It also covers local school districts. Annually it prepares and releases an actuarial valuation and comprehensive annual financial report or CAFR.

During the offering period KPERS was underfunded. At the end of 2008 its unfunded actuarial accrued liability was about $8.3 billion. It had a 59% funded ration. By contrast the tax supported debt of the state was $3.1 billion.

A significant limitation on the debt of the state was a constitutional provision. That provision requires that there be annual appropriations for general debt obligation. This creates a risk that each year the funds would not be appropriated. Rating agencies took this into account.

Beginning in 2004 there were changes made in the way the CAFRs were prepared. Outside accountants suggest that information not be provided on KPERS’s funding ration or unfunded actuarial accrued liability. Rather, certain information was provided regarding KPERS and the State’s expenditures to fund employer contributions to KPERS. After the change no reference was made to the State’s substantially underfunded pension plan.

The Official Statements for the eight series of bonds issued beginning in August 2009 included statements regarding the risk of non-appropriation. Information was also included regarding the amount of certain state indebtedness. There was no mention of the underfunded status of KPERS. At closing certificates were issued certifying that all material information was disclosed and correct.

Once the deficiencies in the disclosures came to light, Respondent undertook prompt remedial measures. Those included new procedures regarding the responsibilities for critical disclosers and closer communication and cooperation among agencies. A State Disclosure Committee was also established. The disclosures for fiscal 2010 resumed including information regarding KPERS contributions and a schedule of funding process. The Official Statements for the most recent revenue bond offerings included a separate appendix discussing KPERS and its underfunded status.

The Order alleges violations of Securities Act Sections 17(a)(2) and (3). The State resolved the proceeding by consenting to the entry of a cease and desist order based on the Sections cited in the Oder.

This is the third case brought by the SEC against a state based on unfunded pension liabilities. Previously, the Commission brought actions against the states of Illinois and New Jersey.

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