The US SEC has charged against a North Carolina-based investment adviser and its former owner for misleading an investment fund’s board of directors about the firm’s ability to conduct algorithmic currency trading so they would approve the firm’s contract to manage the fund.
The SEC’s Enforcement Division has alleged that Chariot Advisors LLC and Elliott L Shifman misled the fund’s board about the nature, extent, and quality of services that the firm could provide as he touted the competitive benefits of algorithmic trading in two presentations before the board.
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Contrary to what Shifman told the directors, Chariot Advisors did not devise or otherwise possess any algorithms capable of engaging in the currency trading that Shifman was describing.
After the fund was launched, Chariot Advisors did not use an algorithm model to perform the fund’s currency trading as represented to the board, but instead hired an individual trader who was allowed to use discretion on trade selection and execution.
The misconduct by Shifman and Chariot Advisors caused misrepresentations and omissions in the Chariot fund’s registration statement and prospectus filed with the SEC and viewed by investors.
Advisers must provide the board with the truthful information necessary to make that evaluation.
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By GlobalDataJulie M. Riewe, co-chief of SEC Enforcement Division’s Asset Management Unit, said: "It is critical that investment advisers provide truthful information to the directors of the registered funds they advise. Both boards and advisers have fiduciary duties that must be fulfilled to ensure that a fund’s investors are not harmed."
According to the SEC’s order instituting administrative proceedings, the false claims by Chariot and Shifman defrauded the Chariot Absolute Return Currency Portfolio, a fund that was formerly within the Northern Lights Variable Trust fund complex.
In December 2008 and again in May 2009, Shifman misrepresented to the Chariot fund’s board that his firm would implement the fund’s investment strategy by using a portion of the fund’s assets to engage in algorithmic currency trading.
Chariot fund’s initial investment objective was to achieve absolute positive returns in all market cycles by investing approximately 80% of the fund’s assets under management in short-term fixed income securities, and using the remaining 20% of the assets under management to engage in algorithmic currency trading.
According to the SEC’s order, Chariot Advisors did not have an algorithm capable of conducting such currency trading. The ability to conduct currency trading was particularly significant for the Chariot fund’s performance, because in the absence of an operating history the directors focused instead on Chariot Advisors’ reliance on models when the board evaluated the advisory contract.
Even though Shifman believed that the fund’s currency trading needed to achieve a 25 to 30% return to succeed, Shifman never disclosed to the board that Chariot Advisors had no algorithm or model capable of achieving such a return.
According to the SEC’s order, because Chariot Advisors possessed no algorithm, currency trading for the fund was under the control of an individual trader who was not using an algorithm for at least the first two months after the fund’s launch.
Shifman had interviewed the trader prior to her hiring and knew that she used a technical analysis, rules-based approach for trading that combined market indicators with her own intuition. The trader traded currencies for the fund until 30 September, 2009 when she was terminated due to poor trading performance. Subsequently, Chariot employed a third party who utilized an algorithm to conduct currency trading on behalf of the Chariot fund.
