Phony “MarketDNA” Claims Yield SEC Charges for Advisor
Cases involving investment advisers are rapidly becoming a key focus for SEC Enforcement. Offering fraud actions are another central focus. In both sets of cases retail investors are typically victimized, losing much of their hard earned savings and pension dollars. In the Matter of Matthew R. Rossi, Adm. Proc. File No. 3-19145 (April 17, 2019) is an action which in many respects combines the elements of each of these types of actions – a dishonest adviser and the hype of an offering fraud.
Respondents are Mr. Rossi who holds a Series 65 license and his firm, SJL Capital, LLC, a state registered investment adviser that managed the MarketDNA Hedge Fund LP and several separately managed accounts or SMAs.
Over a period of months, beginning in May 2016 Respondents defrauded several advisory clients and at least one who invested in the Fund. The Fund supposedly invested in a diversified portfolio of largely publicly traded equity securities It also claimed to have a highly successful proprietary algorithm created by Mr. Rossi known as MarketDNA. The algorithm, developed over a period of years, could take advantage of certain market inefficiencies. Marketing materials touted the success of the approach and its favorable returns while pointing to a feature called a safety value that supposedly protected against loss. The claims were false.
Initial trading returns, employing a high-risk option strategy were, nevertheless, successful. During the initial month of trading profits were made. Those returns vanished during the following months in repeated losses, often concealed from view with false statements furnished to clients.
By March 2017 the SMA clients had loses of over $1.7 million. They revoked the discretionary authority that permitted Respondents to trade. The Fund lost over $300,000. The Order alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4).
To resolve the proceedings each Respondent consented to the entry of a cease and desist order based on the sections cited in the Order. The firm was censured. Mr. Rossi is bared from the securities business. Issues regarding disgorgement, prejudgment interest and penalties will be considered at a hearing to be held in the future.