March 9, 1995
TO: ACCOUNTING/TREASURERS MEMBERS No. 14-95
COMPLIANCE COMMITTEE No. 15-95
SEC RULES MEMBERS No. 17-95
RE: SEC SANCTIONS PORTFOLIO MANAGER FOR FALSIFYING PRICES OF
FUND SECURITIES
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The Securities and Exchange Commission recently sanctioned a fund portfolio manager
in connection with the pricing of certain derivative securities held in the fund’s portfolio. A
copy of the Commissions order is attached.
According to the Commissions order, the portfolio manager used inflated prices for
certain derivative instruments held by the fund he managed, and that by recording these false
prices in the funds records, he caused the fund to overstate its net asset value. Specifically, the
Commission found that during a period in 1993 after two broker-dealers ceased providing daily
prices to the fund for certain derivatives, the portfolio manager independently priced those
instruments instead of obtaining bid side prices from broker-dealers as required by the funds
registration statement. In addition, during part of that period he was found to have provided
the fund with prices for the instruments that were materially higher than the bid side of the
market. He also was found to have supplied two broker-dealer firms with pricing assumptions
for certain derivatives held by the fund. The firms then used those assumptions, rather than
consulting with their trading desks, to price those instruments. Finally, the Commission found
that the portfolio manager requested that a broker-dealer supply him with offered, rather than
bid side daily prices, in violation of the funds policies and procedures as set forth in its
registration statement.
The Commission ordered the portfolio manager to cease and desist from committing or
causing any violation of Sections 31(a) and 34(b) of the Investment Company Act and Rules
22c-1 and 31a-1 thereunder, and Sections 206(1) and 206(2) of the Advisers Act. In addition, the
portfolio manager was fined $11,000 and barred from association with, among others, any
investment company or investment adviser.
Amy B.R. Lancellotta
Associate Counsel
Attachment