The Securities and Exchange Commission recently charged two investment advisory firms and two portfolio managers for their roles in the allleged failure to adequately inform investors about the fund’s risky derivative strategies that contributed to its collapse during the financial crisis.
An SEC investigation found that the Fiduciary/Claymore Dynamic Equity Fund (HCE) attempted two strategies to enhance returns — writing out-of-the money put options and shorting variance swaps. This exposed the Claymore Dynamic Equity Fund to additional undisclosed risks and caused the fund to lose more than $45 million in September and October 2008, which was approximately 45 percent of its net assets. The fund liquidated in 2009.
Fund adviser and administrator Claymore Advisors LLC, which is located in Lisle, Ill., and the sub-adviser responsible for managing HCE’s portfolio, St. Louis-based Fiduciary Asset Management LLC (FAMCO), agreed to settle the SEC’s charges. Claymore has established a plan to distribute up to $45 million to fully compensate investors for losses related to the problematic trading. FAMCO agreed to pay an additional $2 million in disgorgement and penalties.
According to the SEC’s orders instituting the settled and unsettled administrative proceedings, FAMCO managed HCE in a manner that was inconsistent with the fund’s registration statement. Through the portfolio managers, FAMCO made misleading statements about HCE’s performance, omitting discussion of contributions from the put-writing and variance swap strategies. FAMCO also made misleading statements about HCE’s exposure to downside risk. Investors in HCE lost $45,396,878 as a result of this riskier trading, and the fund lost $70 million total (72.4 percent of its net asset value) during this period of general market decline.
The SEC’s order found that Claymore failed reasonably to supervise FAMCO as required by the firms’ investment advisory agreements, and found that Claymore caused HCE’s failure to provide adequate disclosure in HCE’s annual report or an amended registration statement about the fund’s use of written put options and variance swaps and their associated risks. Claymore consented to the order without admitting or denying the charges, and has established a distribution plan to fully reimburse shareholders for up to $45,396,878 in losses from these derivative transactions.
FAMCO agreed to pay disgorgement of $644,951, prejudgment interest of $134,978, and a penalty of $1.3 million. Without admitting or denying the charges, FAMCO agreed to be censured and to cease and desist from committing or causing any violations of Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8, and Section 34(b) of the Investment Company Act of 1940.
The foregoing information, which is publicly available on the SEC’s website, is being provided by The White Law Group. The White Law Group is a national securities fraud, seccurities arbitration, and investor protection law firm with offices in Chicago, Illinois and Boca Raton, Florida.
For more information on The White Law Group, visit https://www.whitesecuritieslaw.com.