Macquarie to Pay $79.8 Million to Settle SEC Fraud Charges

The Securities and Exchange Commission (SEC) said Macquarie Investment Management Business Trust (MIMBT) will pay $79.8 million to settle fraud charges.

The regulator charged the registered investment adviser with overvaluing about 4,900 largely illiquid collateralized mortgage obligations (CMOs) and executing hundreds of cross-trades between advisory clients that favored certain clients over others, according to a Thursday (Sept. 19) press release.

Macquarie Asset Management, the parent company of MIMBT, said in a statement issued Thursday that the product that was the focus of the SEC’s investigation was discontinued in April 2021, and the firm agreed to settle the investigation without admitting to or denying the SEC’s findings.

“Our business is built on the principles of integrity and accountability,” the firm said in the statement. “This legacy matter is not consistent with how we do business. We have already undertaken and are focused on completing additional remedial steps to address the issues identified in the investigation, with clients the priority. We also continue to invest in our risk culture to ensure we discharge our fiduciary duties to the highest standard.”

The SEC alleged that MIMBT valued thousands of smaller-sized, “odd lot” CMOs using prices obtained from a third-party pricing service that were intended for larger-sized, institutional lots only, according to the regulator’s press release. The odd lot CMOs traded at a discount to institutional positions.

The regulator alleged that MIMBT then marked thousands of odd lot CMO positions at inflated prices and overstated the performance of client accounts holding the overvalued CMOs, the release said.

The SEC also alleged MIMBT, rather than selling the overvalued CMOs into the market, arranged cross-trades with affiliated accounts to minimize losses to redeeming investors, per the release. These trades resulted in the retail mutual funds absorbing losses that otherwise would have been borne by the selling account when sold into the market, the release said.

“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 the release. “Utilizing a third-party pricing service does not negate an investment adviser’s obligation to value assets accurately.”

MIMBT agreed to a censure and to pay a $70 million penalty and an additional $9.8 million in disgorgement and prejudgment interest.