The Securities and Exchange Commission on Thursday announced settled charges against investment adviser Everest Capital and its sole principal for risk management failures stemming from a bad currency bet it had made.
According to the SEC, Marko Dimitrijevic was Everest’s sole managing member, majority owner, chief investment officer, and the sole portfolio manager of its largest fund, the Everest Capital Global Fund. The SEC proceedings arose out of Everest’s and Dimitrijevic’s acts “inconsistent with disclosures regarding investment concentration and risk controls” pertained to their management of the Everest Capital Global Fund, according to the SEC’s order.
The Global Fund’s confidential private offering memorandum described the Global Fund’s investment objective and strategy as “an active and disciplined investment management style that is driven by extensive research and risk management,” the SEC order states. Everest and Dimitrijevic previously indicated Dimitrijevic had learned from substantial losses the Fund incurred in 1998 due to highly concentrated positions in Russian investments, and therefore would not take concentrated positions in any single geographic region. Despite these representations, the order found that from September 2014 through January 2015, Everest and Dimitrijevic made “highly concentrated investments in the euro to Swiss franc exchange rate, such that the Global Fund’s gross exposure based on that position alone ranged from approximately 400% to over 900%.”
The SEC further found Everest and Dimitrijevic “did not apply the promised risk management to the Global Fund’s currency investments and that the gross exposure information Everest provided in marketing materials was misleading because the materials underreported the Global Fund’s gross exposure by excluding currency positions, including the euro to Swiss franc exchange position.”
As to risk controls, Everest and Dimitrijevic represented to Fund investors that its risk management team had “the ability to reduce risk independent of the investment team,” but did not disclose that risk management “had no independent authority or ability to reduce risk with respect to currency positions the Fund may take,” the SEC order stated. On Jan. 15, 2015, the Swiss franc soared more than 30 percent versus the euro that day, and the Global Fund sustained crippling losses exceeding its assets.
Thus, the SEC’s order finds Everest and Dimitrijevic violated the anti-fraud provisions of Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8. Without admitting or denying the findings, Everest and Dimitrijevic agreed to be censured, to cease-and-desist from violating the charged provisions, and to pay a penalty of $750,000.
Everest also agreed to pay disgorgement of $2 million and prejudgment interest of $458,226. In addition, Everest agreed to establish a Fair Fund and distribute the ordered disgorgement, penalty, and prejudgment interest to Global Fund investors pursuant to a respondent-administered distribution.