Recently, the Securities and Exchange Commission settled charges against eight former directors of Morgan Keegan bond mutual funds for failing to control the portfolio managers they administered, allowing for mortgage assets to be overvalued prior to the 2007 financial crisis. Under federal securities laws, fund directors are responsible for determining the fair value of portfolio securities for which market quotations are not readily available. In addition, fund directors must determine the methodologies to be used to fair value securities and must periodically reevaluate the appropriateness of those methodologies. The SEC order finds that the eight directors failed to make a diligent effort to understand how fair values were being determined. Furthermore, the directors delegated this responsibility to a valuation committee without providing adequate guidance on how fair-valuation determinations should be made, resulting in the funds having overstated value of their securities. While no fines were imposed on the former directors, the SEC order required that the eight men, cease and desist from committing or causing any future violations. “Our settlement sends a clear warning of our commitment to enforce the duty of mutual fund directors and trustees to closely oversee the process of valuing securities held by their funds,” said George S. Canellos, Co-Director of the SEC’s Division of Enforcement.
In May, the SEC announced charges against four individuals in an alleged “pay-to-play” scheme in which the global markets group from brokerage firm Direct Access Partners (DAP) executed fixed-income trades for customers in foreign sovereign debt. This generated $66 million in revenue from transaction fees related to fraudulent trades they executed for state-owned Venezuelan bank Banco de Desarrollo Económico y Social de Venezuela (Bandes). Recently, the SEC has charged the former head of DAP’s Miami office, Ernesto Lujan, for his integral role in the massive scheme to secure the bond trading business of Bandes. According to the SEC, Lujan and others allegedly deceived DAP’s clearing brokers, executed internal wash trades, positioned another broker-dealer in the trades to conceal their role in the transactions, and engaged in massive roundtrip trades to pad their revenue. In a parallel action, Mr. Lujan was recently arrested for felony charges related to the conspiracy to bribe the Vice President of Finance at Bandes, according to the U.S. Attorney’s Office for the Southern District of New York. The SEC’s amended complaint filed in federal court in Manhattan charges Lujan and the other defendants with fraud and seeks final judgments that would require them to return ill-gotten gains with interest and pay financial penalties.