SEC Accuses Ex-Fund Manager of Tipping Off Family to Sell Shares

The Securities and Exchange Commission has accused the former manager of two Schroders Investment Management municipal bond mutual funds of tipping his family members about impending distress to the funds and urging them to sell their shares.

The SEC has instituted proceedings against David Baldt, 60, who joined Schroders in October 2003 to launch the company’s municipal business.

Baldt managed two Schroders funds: the Schroder Municipal Bond Fund and the Schroder Short-Term Municipal Bond Fund.

Baldt’s family held most of its savings in the short-term fund.

As the financial crisis began percolating in the third quarter of 2008, one of the family members asked whether she should sell her shares in the funds.

Baldt told her that if it would make her feel better, she should sell her shares and keep the money in short-term Treasury debt, according to the SEC’s order for administrative proceedings.

During the last two weeks of September and the first week of October 2008, more investors began trying to withdraw money from the funds, the SEC said.

The funds were having trouble meeting all the redemptions, so Schroders instructed Baldt to sell some of the bonds to build a cash cushion of 10% to 12% of the funds’ assets.

At the end of September, the short-term fund had $150.2 million in assets, and the long-term fund had $138.9 million.

Baldt thought this was a bad idea. If the funds tried to sell their bonds, the market would recognize it was in trouble and brokers would know they could pick up the bonds at distressed prices, he argued.

Schroders told him to sell the bonds anyway to raise cash.

After the market closed on Oct. 3, 2008, Baldt talked to his family member on the phone again. He told her to “go the full route” with the plan he had suggested earlier, to sell out of the fund and buy Treasury bills, the SEC alleges.

The next two trading days, three of Baldt’s family members redeemed a total of $200,000 from the fund.

They tried to redeem $3.1 million after that, but by then it was too late.

Schroders closed and liquidated both funds.

The SEC claims Baldt’s alleged behavior constituted misuse of confidential information.

He understood that the redemptions facing the fund and company’s directive to sell bonds to raise cash meant the fund was in trouble, the SEC said.

He advised his family to sell their shares while in possession of material information that was not public, the commission alleges.

The SEC plans a hearing before an administrative judge in the next 30 to 60 days.

Neither Schroders nor Baldt could be immediately reached for comment.

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