Advisory firm skinned investors by claiming 'skin in the game': SEC

Aladdin Capital agrees to settle charges that it misled retirement plans about CDOs

Dec 17, 2012 @ 3:56 pm

By Liz Skinner

SEC
+ Zoom

A Connecticut-based advisory firm allegedly lured investors into backing two complex debt deals by telling them the firm had invested its own money in the securities — even though it hadn't.

According to the Securities and Exchange Commission, Aladdin Capital Management LLC of Stamford, Conn., helped sell the investments by stressing the firm's own interests in the collateralized debt obligations. One marketing piece, the SEC claims, emphasized that “putting meaningful 'skin in the game' as we do means our financial interests are aligned” with our investors', according to the commission's allegations.

But the advisory firm made no investment in either CDO, and its affiliated broker-dealer, Aladdin Capital LLC, collected placement fees from the investments' underwriters, the SEC said.

CDOs are securities that are backed by a pool of bonds, loans or other assets.

Aladdin Capital Management and Aladdin Capital agreed to pay $1.6 million to settle the allegations stemming from the misstatements, and the adviser's former executive, Joseph Schlim, agreed to pay a $50,000 fine for his role in the deception, SEC said.

“If you sell an investment with the pitch that you are co-investing and have 'skin in the game,' then you better actually have 'skin in the game,'” said Robert Khuzami, director of the SEC's enforcement division. “Such a representation by an investment adviser or broker dealer is an important consideration to investors in complex products.”

The SEC said Aladdin Capital Management told three investors — a retirement plan for about 10,000 employees of a municipal transportation agency, a pension plan for a chain of retail stores, and an individual entrepreneur who invested his own funds and those of his charitable foundation — that it would invest in the CDOs alongside them.

The adviser continued to tell those investors that the firm had 'skin in the game,' from 2007 to 2010 even though the firm never invested in the CDOs, the SEC said.

Aladdin Capital Management and Mr. Schlim agreed to cease-and-desist orders without admitting or denying the SEC's allegations.

In a statement, Aladdin said that the person responsible for reserving funds for Aladdin's co-investments “failed to ensure that Aladdin reserved or allocated the funds to make” the co-investments in these two CDOs. The firm co-invested in more than a dozen other deals that it said it would between 2005 through 2009, the statement said.

“We have worked hard with the SEC over the past two and a half years to try to resolve this issue, and we are happy to be able to move forward,” said Aladdin founder Amin Aladin.

Mr. Schlim's attorney, Jack Sylvia of Paul Hastings, said his client left Aladdin in early 2009 and is “pleased to have this matter behind him and looks forward to directing his attention to his current endeavors.”

0
Comments

What do you think?

View comments

Recommended for you

Featured video

Events

Why the bionic adviser is the way of the future

The bionic adviser is the way of the future. We spoke with Simon Roy of Jemstep to get his insights on how technology will continue to impact the industry.

Video Spotlight

Will It Last As Long As Your Clients Do?

Sponsored by Prudential

Video Spotlight

The Catalyst

Sponsored by Pershing

Latest news & opinion

Voya's win in 401(k) fee suit involving Financial Engines bodes well for other record keepers

Fidelity, Aon Hewitt and Xerox HR Solutions are currently defending against similar fiduciary-breach claims.

Collective investment trusts getting more attention from 401(k) advisers

The funds are catching on due largely to lower costs and more product availability, but come with some inherent drawbacks.

Vanguard rides robo-advice wave to $65B in assets

Personal Advisor Services, four times the size of its closest competitor, combines digital and human touch.

CFPs, including brokers, may have to adhere to a stricter fiduciary duty

CFP Board revises its standards and aims to beef up fiduciary requirements of certificants.

CFP Board's proposal to expand fiduciary duty draws praise, carries risks

Some question whether brokers will drop the CFP mark or if the CFP Board will strictly enforce its new standard.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print