SEC Sues IA for Using MNPI in the Trading of Distressed Bonds
The SEC sued an investment adviser for deficiencies in handling material nonpublic information ("MNPI") while trading Puerto Rico bonds.
According to the Complaint filed in the US District Court of Connecticut, the adviser engaged in the public trading of distressed bonds issued by Puerto Rico, while participating in private confidential bankruptcy mediation sessions over how the distressed entity could repay its debt. The SEC claimed that the adviser relied on a consultant to act as its representative in these sessions, during which the consultant received MNPI, including proposals for settlement terms and financial details marked confidential. The SEC alleged that the consultant subsequently engaged in over 500 unmonitored calls with the adviser's public-side employees responsible for trading the bonds. In addition, the SEC claimed that the fee paid to the consult (who was himself a lawyer) was largely determined on an ad hoc basis by the individual who was primarily responsible for trading the relevant bonds.
The SEC claimed that the firm's compliance policies were deficient in two critical areas. First, the firm failed to implement a clear designation for consultants as either public-side or private-side employees, leaving key participants exempt from required MNPI controls. Second, the firm failed to enforce its information barrier policies by failing to pre-approve or monitor interactions between its consultant and public-side employees, despite the consultant's routine access to MNPI. The SEC also charged the firm for failing to maintain adequate logs of these communications or conduct any surveillance of email correspondence. The SEC stated that this lack of oversight coincided with the relevant private fund generating $29 million in profits from bond trades executed during the same period the consultant held the MNPI.
The SEC charged the adviser with violations of Advisers Act Sections 204A ("Prevention of misuse of nonpublic information") and 206(4) ("Prohibited transactions by investment advisers") and Rule 206(4)-7 ("Compliance procedures and practices").
The SEC requested the Court enter a final judgement (i) permanently enjoining defendant from further violations of the Advisers Act and (ii) ordering defendant to pay civil money penalties.