SEC Charges Two Ex-Fund Managers With Taking Sham Fees From Issuers

The Securities and Exchange Commission on Friday charged two former portfolio managers with defrauding a tax-free mutual fund that invests primarily in municipal debt issued in Utah. It appears to be the first such case in which portfolio managers for a registered investment adviser were charged with taking fees from municipal bond issuers, sources said.

Kimball Young, 64, and Thomas Albright, 58, settled separate administrative actions without admitting or denying the SEC’s findings that while managing the Utah fund, they improperly billed issuers for more than $500,000 in undisclosed “credit monitoring fees“ that they pocketed for themselves.

The pair managed The Tax Free Fund for Utah created by Aquila Investment Management LLC, though Aquila was not charged with any wrongdoing and was credited by the SEC for its assistance in uncovering the fraud.

In settling the SEC’s charges, Young, who lives in Salt Lake City, agreed to disgorge $260,313 plus interest, pay a $75,000 penalty, and submit to a five-year ban from the securities and investment advisory industries. Albright, who lives in Louisville, agreed to disgorge $260,313 plus interest, pay a $50,000 penalty, and submit to a one-year ban from these industries.

“Young and Albright violated the most basic duties that investment advisers owe the mutual funds they serve — to act in the best interests of the fund and disclose any conflicts of interest they face,” said Bruce Karpati, co-chief of the asset management unit in the SEC’s division of enforcement. “Instead of acting in the fund’s best interests, they defrauded the fund by secretly taking fees that neither the fund nor its board knew about.”

Nancy Hendrickson, of the Hendrickson Law Firm PLLC in Chicago, who represents Young and Albright, declined to comment on the settlement.

According to the SEC’s orders, the pair convinced the issuers that the fees, which were paid at closing and ranged between 0.5% and 1% of each bond’s par value, were compensation for performing ongoing credit monitoring that they claimed was required because the bonds were not rated. However, Young and Albright had the fees wired to a company controlled by Young, who shared them equally with Albright, and the pair never informed Aquila’s management or the fund’s board of trustees about them, the SEC found.

On multiple occasions, the SEC said, Young, who was principally responsible for dealing with issuers, reviewed and signed documents that misrepresented the true recipient of the monitoring fees in bond documents, including closing memoranda, certifications, and the loan agreements.

The fees totaled $520,626 from 2003 to April 2009, including $256,071 for the year 2008 alone, the SEC said. It noted that any credit monitoring work performed by Young and Albright was part of their regular job responsibilities.

In addition, the pair knew that in 2001, at the fund board’s request, Aquila retained an independent consultant to perform ongoing credit analyses of all bonds in the fund’s portfolio, including nonrated bonds. Though the board was particularly concerned with private placements and the risks they posed and inquired about the credit risk, Young and Albright never mentioned that they were performing “purported extra credit monitoring work” for which they were being compensated by issuers, the SEC said.

According to the SEC’s orders, Aquila management learned in April 2009 that Young and Albright had been charging the fees, at which point Aquila promptly suspended Young and Albright and reported their conduct to the commission.

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