Chatham Asset Management settles SEC charges over improper trades
New Jersey based hedge fund Chatham Asset Management and the firm's founder Anthony Melchiorre have agreed to pay more than $19.3 million to settle Securities and Exchange Commission (SEC) charges that they improperly traded fixed income securities.
In a statement the SEC said Chatham and Melchiorre have agreed to settle charges that from 2016 through 2018, one Chatham-advised client sold certain American Media, Inc (AMI) bonds while a different Chatham-advised client purchased the same bonds through various broker-dealers. According to the SEC's order, Chatham engaged in these trades to address portfolio constraints such as industry or issuer fund concentration limits, meet investor redemptions, and allocate capital inflows and outflows.
The SEC order said these trades were also executed at prices Chatham and Melchiorre proposed and had the effect of increasing the price of the AMI bonds at a significantly higher rate than the prices of similar securities. Chatham’s and Melchiorre’s trading in the AMI bonds accounted for the vast majority of trading in those securities and therefore over time had a material effect on their pricing.
The SEC order also found that Chatham and Melchiorre calculated the net asset values, or NAVs, of their client funds’ holdings using pricing data that was based, in part, on the trading prices of the securities. As a result, during the relevant period, the NAVs of Chatham’s clients were higher than they would have been if the subject trades were removed from the market for the AMI bonds, which, in turn, resulted in higher fees being charged to the clients.
Chatham and Melchiorre consented to the SEC’s order, without admitting or denying its findings, that they violated Section 206(2) of the Investment Advisers Act of 1940, and that they aided and abetted and caused violations of the Investment Company Act of 1944. Chatham and Melchiorre agreed jointly and severally to pay $11 million in disgorgement and around $3.4 million in prejudgment interest. They also agreed to pay civil penalties of $4,400,000 and $600,000, respectively. Finally, they agreed to prohibitions from serving in certain positions in the investment industry, pursuant to the Investment Company Act.