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SEC Charges Detroit-Based IA Firm, Portfolio Manager, With Fraud

WASHINGTON — The Securities and Exchange Commission has charged Detroit-based Ambassador Capital Management and portfolio manager Derek Oglesby with fraud for investing in risky securities and passing them off to investors, including municipalities, as safe money market funds.

The SEC’s administrative proceeding stems from a November 2011 investigation that was part of “an ongoing analysis of money market fund data” by the SEC’s investment management division, the commission said.

The complaint alleges that ACM violated the Investment Advisors and Investment Company Acts of 1940 and that Oglesby aided and abetted the violations with false statements to trustees of the Ambassador Money Market Fund about the riskiness of securities in the fund’s portfolio, as well as the fund’s diversification and exposure to the 2011 Eurozone crisis.

The SEC conducted the 2011 compliance examination of AMMF after noticing the fund had been consistently outperforming other prime money market funds, the SEC complaint states. Money market funds are often appealing investment vehicles for local governments, who can take advantage of the liquidity  they provide to meet payroll and other short-term obligations. AMMF was designed to appeal to Michigan municipalities, and at times more than half of the shareholders’ investments in AMMF came from just local governments; Detroit and Washtenaw County.

The fund was governed by a board of trustees that granted responsibility of AMMFs day-to-day management to ACM. The board instructed ACM to purchase only securities with minimum credit risk, as required by Rule 2a-7 of the Investment Company Act. However, ACM violated this provision in two ways, the SEC said.

“First, ACM exceeded its own maturity restrictions for securities held in AMMF’s portfolio,” the SEC order alleges. “Second, ACM purchased securities for AMMF without making a determination that the security posed a ‘minimal credit risk.’”

ACM never disclosed to the board that it was sometimes buying securities with maturities exceeding the firm’s own operational guidelines, the SEC said, and Oglesby never mentioned it in regular reports to the board. To comply with Rule 2a-7, a money market fund must make a written record of its analysis and determination that a portfolio security presents minimal credit risk, and retain the written record for at least three years. ACM’s own policies and procedures echoed this requirement, the SEC noted. However, in 2009 and 2010, the firm’s analysts determined it held more than 50 securities with more than minimal credit risk.

Oglesby also misled the board by claiming the fund had “minimal” exposure to troubled European markets in 2011, even though ACM purchased Italian-affiliated asset-backed paper for AMMF throughout 2011, representing 9% of its portfolio.

“Money market fund managers must not hide the ball from a fund’s board,” said George S. Canellos, co-director of the SEC’s Enforcement Division.  “Ambassador Capital Management and Oglesby weren’t truthful about whether securities in the portfolio threatened to destabilize the fund, and they failed to operate under the strict conditions designed for money market fund managers to limit risk exposure and maintain a stable price.”

ACM committed further violations by failing to diversify the portfolio enough to mitigate risk and by failing to do appropriate stress testing, the SEC found.

A hearing will take place before an administrative law judge in the next 30-60 days. The SEC has asked the ALJ to consider whether the firm and Oglesby should be fined or required to disgorge ill-gotten gains, as well as whether a cease and desist order should be imposed on them to prevent them from committing further violations.

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