The Securities and Exchange Commission (SEC) on Thursday filed a civil action against investment management firm LJM and two of its portfolio managers for fraudulently misleading investors about the company’s risk management practices and the level of risk in its portfolios.
The SEC is seeking permanent injunctions, disgorgement with prejudgment interest, and civil penalties from LJM Funds Management and LJM Partners (collectively, LJM) and portfolio managers Anthony Caine and Anish Parvataneni. Caine is also the owner and founder of LJM.
According to the SEC’s complaint, LJM adopted a short volatility trading strategy that “carried risks that were remote but extreme.” To ease investor concerns about the potential for losses, the company, Caine, and Parvataneni “crafted an effective, yet false, marketing narrative which touted their purported ‘risk centric’ approach to investing and avowed their ‘managing principle’ was to maintain a consistent risk profile and consistent risk levels, even if it meant lower returns,” the complaint states.
Beginning in late 2017, LJM, Caine, and Parvataneni increased the level of risk in the portfolios to chase return targets while falsely assuring investors the portfolios’ risk profiles remained stable, according to the SEC. When the financial markets suffered a large spike in volatility over two trading days in February 2018, “the investment funds managed by LJM Management and LJM Partners suffered trading losses of more than $1 billion (approximately 80 percent of their value),” the complaint states.
The SEC has charged the defendants with violating the antifraud provisions of the federal securities laws.
“This case demonstrates the critical importance of fund advisers being truthful and transparent with investors about how they manage risk,” said Daniel Michael, chief of the Enforcement Division’s Complex Financial Instruments Unit at the SEC, in a press release.
In a parallel action, the Commodity Futures Trading Commission (CFTC) filed charges against LJM, Caine, and Parvataneni. LJM and Caine are charged with “failing to diligently supervise their employees and agents who, among other things, made certain false and misleading statements and failed to comply with LJM’s risk policy,” the CFTC said.
The CFTC is similarly seeking disgorgement, civil penalties, and permanent injunctions.
Chief risk officer penalized
As explained in the CFTC order against Ariathurai, statements made by the risk officer in a risk FAQ and 2016 due diligence questionnaire were “false and misleading.” This included Ariathurai allegedly pegging the worst-case scenario for losses on a portfolio to be between 20-40 percent, depending on strategy.
When speaking to prospective and existing pool participants about LJM’s risk management, Ariathurai “failed to disclose that LJM did not actually implement historical scenarios in risk management,” the CFTC said.
Ariathurai agreed to be barred from the industry with a right to apply for re-entry after three years; to pay disgorgement and prejudgment interest of $97,444; and to pay a civil penalty of $150,000. The penalties, described in each the SEC and CFTC orders, offset.
Ariathurai neither admitted nor denied the agencies’ findings.
“We categorically deny all of the SEC’s and CFTC’s assertions, have summarily rejected their respective settlement offers and will vigorously defend ourselves,” Caine said in a statement in response to the enforcement actions. “We will demonstrate that risk of loss was fully disclosed, LJM did not deviate from historic portfolio and risk management practices, and the losses sustained on Feb. 5-6, 2018 occurred as a result of events outside of LJM’s control.”
“The suggestion that LJM committed fraud has no factual basis and is undermined by the fact that I personally lost over $100 million on Feb. 5-6, 2018, and LJM portfolio managers invested more than $500,000 new capital on Feb. 1, 2018 in the same funds as LJM investors,” Caine added. “We will vigorously defend these false claims while continuing to aggressively pursue actions to seek financial recourse for LJM investors.”