SEC Charges Money Market Fund Manager with Fraud (with Lofchie Comment)

The SEC has announced fraud charges against a Detroit-based investment advisory firm to an SEC-registered money market fund and a portfolio manager of that fund for deceiving the trustees of the fund as to the quality and risk of the assets held by the fund. The SEC alleged that Ambassador Capital Management and its principal repeatedly made false statements to the trustees of the fund as to the credit risk in the securities purchased for the portfolio. According to the Order, the risk was so substantial that the fund was not, in fact, legally a "money market fund" as defined by Rule 2a-7 under the Investment Company Act.

The SEC stated that the enforcement action stems from an ongoing analysis of money market fund data by the SEC's Division of Investment Management. The SEC noted that the performance of the Ambassador Money Market Fund was identified as consistently different than the rest of the market, which had led to the investigation by the Enforcement Division.

Lofchie Comment: Paragraphs 14-16 of the Order make passing mention of some odd facts. Paragraph 14 says that the fund was "designed to appeal to Michigan municipalities," but, given that the fund invested in assets such as U.S. Treasury instruments, certificates of deposit and foreign sovereigns, it is not clear what there was about the design that was so appealing to the municipalities. Paragraph 16 indicates that more than half of the investments in the fund came from just two investors who were in "pursuit of liquidity and security," but does not indicate what was particularly appealing about this fund to these investors.

See: SEC Order; SEC Press Release.