Commodity Pool Operator (CPO) Equinox Fund Management is to pay a USD250,000 penalty and disgorgement of USD5,404,004 to settle CFTC charges that it made misstatements and omissions in disclosure documents and reports for the Frontier Fund (TFF).
A CFTC order finds that TFF’s disclosure documents prepared by Equinox wrongly disclosed the basis on which management fees were charged, leading to overcharges of management fees of USD5.4 million. Additionally, TFF’s annual and quarterly reports misstated that its valuation of certain options was corroborated by the counterparty’s settlement values; failed to disclose a material subsequent event; and misstated that an option had been transferred between two series of TFF in accordance with TFF’s valuation policies.
As set forth in the Order, from 2004 through March 2011, disclosure documents for TFF disclosed that Equinox charged management fees based upon the net asset value (NAV) of each series, when Equinox actually charged TFF management fees based upon the value of the notional assets it was managing in each series, thereby charging TFF USD5.4 million more than what would have been charged based upon NAV.
Additionally, the 2010 annual report for TFF disclosed that its methodology of valuing certain options was “corroborated by weekly counterparty settlement values,” when in fact, Equinox received information during that timeframe showing that its valuation of certain options was materially higher than the counterparty’s indicative settlement valuations. Moreover, TFF’s quarterly reports to pool participants were misleading in that (1) a report for the second quarter of 2011 failed to disclose as a material subsequent event a series’ early termination of an option at a valuation that was materially different than the value that had been recorded for that option, and (2) a report for the third quarter of 2011 disclosed that an option had been transferred between two series in accordance with TFF’s valuation policies, when, in reality, Equinox transferred the option using a valuation methodology that differed from the methodology used to value substantially identical options held by other TFF series, in violation of TFF’s valuation policies.
Equinox was also registered as an investment adviser with the US Securities and Exchange Commission (SEC), and the offering of units for each TFF series was registered under the Securities Act. The SEC on 19 January, 2016 settled charges for related conduct, and the CFTC Order provides credit for any amount of disgorgement Equinox pays pursuant to the SEC settlement.
