The Securities and Exchange Commission has leveled fraud charges against a Stamford-based investment advisory firm, Atlantic Asset Management LLC, for investing clients in certain bonds with hidden financial benefits to a broker-dealer connected to the firm.
The SEC alleges that AAM invested more than $43 million of client funds in illiquid bonds issued by a Native American tribal corporation without disclosing the conflict of interest that the bond sales generated a private placement fee for the broker-dealer, whose parent company partially owns AAM.
“As alleged, Atlantic violated a fundamental duty to its clients by placing its own financial interests ahead of client interests,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “AAM’s clients should have been informed that the investments in illiquid bonds would financially benefit people with ownership control over AAM.”
According to the SEC’s complaint filed in federal court in Manhattan:
- AAM is partially owned by an entity called BFG Socially Responsible Investing Ltd., although BFG’s ownership is not disclosed in AAM’s public SEC filings.
- At the suggestion of a BFG representative, AAM purchased the dubious, illiquid bonds on behalf of clients while aware that the sales would generate a private placement fee for a broker-dealer affiliated with BFG. AAM also was aware that proceeds from the bond sales were to be used to purchase an annuity provided by BFG’s parent company.
- An AAM officer evaluating whether or not to make the investments discussed balancing the “fiduciary duty” owed to the placement agent with the duty owed to AAM’s clients.
- AAM ultimately decided to put its owner’s financial interests first, approving the bond purchases without telling clients about the conflict of interest.
- Upon learning about the investments in the bonds, several AAM clients expressed concern over the bonds’ valuation and suitability. They demanded, unsuccessfully, that the investments be unwound.
The SEC complaint charges AAM with violations of the antifraud provisions of the Investment Advisers Act of 1940 and related rules as well as violations of Section 207 of the Advisers Act by failing to disclose BFG’s ownership interest in the Form ADV filed with the SEC.
The SEC’s investigation is ongoing.