The Commodity Futures Trading Commission (CFTC) announced Tuesday that Edward Walczak, former portfolio manager for N.Y.-based Catalyst Capital Advisors, was found liable for “engaging in conduct that operated as a fraud or deceit upon investors, potential investors, or investment advisers” in violation of the Commodity Exchange Act.
On April 15, a jury in the U.S. District Court for the Western District of Wisconsin issued a verdict after a five-day trial that was the culmination of an action brought by the CFTC against Walczak in January 2020.
In the January 2020 order simultaneously brought by the CFTC and the Securities and Exchange Commission (SEC), Catalyst President and Chief Executive Jerry Szilagyi agreed to pay a combined $10.5 million to settle charges of “materially misleading statements” and “for failing to implement an adequate supervisory system to prevent such misstatements.”
Between December 2016 and February 2017, Catalyst told investors it abided by a “strict set of risk parameters,” but breached those parameters and failed to take the required corrective action, according to a press release by the SEC.
“[T]he fund lost hundreds of millions of dollars—approximately 20 percent of its value–from December 2016 through February 2017 as markets moved against it,” according to the press release. The SEC’s complaint against Walczak alleged he told investors the fund “employed a risk management strategy involving safeguards to prevent losses of more than 8 percent,” when “no such safeguards limited losses and Walczak did not otherwise consistently manage the fund to an 8 percent loss threshold.”
The SEC’s order found Catalyst “violated the antifraud provisions of the federal securities laws, and that Szilagyi was a cause of (Catalyst’s) violations and failed reasonably to supervise Walczak.”
Without admitting or denying the findings, the company and Szilagyi agreed to be censured; cease and desist from future violations; and pay disgorgement of $8,176,722, prejudgment interest of $731,759, and a combined civil penalty of $1.6 million.
The SEC’s complaint against Walczak alleged he violated the antifraud provisions of federal securities laws and sought a permanent injunction, disgorgement of ill-gotten gains, and a civil penalty. Further proceedings will follow regarding sanctions.
“True and accurate disclosures are critical to investor protection,” said CFTC Acting Director of Enforcement Vincent McGonagle in a press release. “As we said at the outset of this case, the CFTC is committed to holding accountable individuals that misstate the risks of investing in their products.”
For the trial, the CFTC’s case was consolidated with the SEC’s action against Walczak.