One of Macquarie Asset Management's RIA subsidiaries in the US has been hit with an $80 million penalty for what the SEC said was a years-long pattern of misconduct within one of its fixed income strategies.
On Thursday, the regulator announced its settlement with Macquarie Investment Management Business Trust to resolve fraud charges relating to overvalued assets and illegal cross trades that, according to the SEC, unfairly benefitted some clients while disadvantaging others.
Those assets and trades occurred within MIMBT's Absolute Return Mortgage-Backed Securities strategy, which primarily invested in mortgage-backed securities, collateralized mortgage obligations, and treasury futures.
The SEC order found that between January 2017 and April 2021, MIMBT overvalued approximately 4,900 CMOs in 20 advisory accounts, including 11 retail mutual funds. These CMOs were largely illiquid, making them difficult to accurately price.
According to the SEC, MIMBT used third-party pricing services intended for institutional-sized positions, which did not distinguish between those larger orders and the smaller, “odd lot” CMOs it held. As a result, MIMBT overstated the value of thousands of odd lot CMO positions, leading to inflated performance reports for the affected accounts.
"MIMBT did not have a reasonable basis to believe that the Pricing Vendor Marks accurately reflected the price the Strategy Accounts could reasonably expect to receive for the odd lot Relevant CMO positions in a current market sale," the order said.
That error in odd-lot pricing, and consequent mismatch between expected and actual performance, mirrors a 2016 settlement between the SEC and Pimco, which saw the bond giant pay $20 million for allegedly misleading investors in its Total Return ETF.
In an attempt to mitigate losses for redeeming investors, the SEC said MIMBT engaged in hundreds of cross trades with affiliated accounts, a practice the regulator deemed unlawful. In one case, MIMBT arranged 465 internal cross trades that allowed some clients to offload the overvalued CMOs at inflated prices. This caused retail mutual funds to absorb losses that otherwise would have been borne by the selling accounts in open market sales.
Additionally, MIMBT facilitated 175 dealer-interposed cross trades, temporarily selling and repurchasing the same positions at above-market prices to provide liquidity to redeeming investors.
“It is alarming that a fiduciary took advantage of retail mutual funds it advised and executed unlawful cross trades to mitigate its overvaluation of fund assets,” Eric I. Bustillo, director of the SEC’s Miami Regional Office, said in a statement. “Utilizing a third-party pricing service does not negate an investment adviser’s obligation to value assets accurately.”
Without admitting or denying the SEC’s findings, MIMBT agreed to a $70 million penalty, plus $9.8 million in disgorgement and interest. The firm also committed to hiring a compliance consultant to review its valuation practices and policies related to cross trading.
In an official statement, Macquarie Asset Management, the parent company of MIMBT, emphasized its focus on integrity.
“This legacy matter is not consistent with how we do business,” the statement read. “We have already undertaken and are focused on completing additional remedial steps to address the issues identified in the investigation, with clients the priority.”
The settlement brings an end to the SEC’s investigation into the firm’s Absolute Return Mortgage-Backed Securities Strategy, which was discontinued in April 2021.
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