A U.K.-based investment fund has agreed to pay $170 million as part of a settlement with the Securities and Exchange Commission (SEC) for allegedly violating anti-fraud provisions of U.S. securities laws.
According to the SEC, BlueCrest Capital Management, based on the isle of Jersey, failed to disclose to investors the existence of a $1.5 billion hedge fund owned by executives, called BSMA Limited. The BSMA fund poached top traders from BlueCrest’s main investment fund, then replaced them with a computer algorithm that underperformed compared to live traders. The arrangement created numerous conflicts of interest that were not disclosed while also harming investors in BlueCrest’s main fund, the SEC said.
BlueCrest agreed to a cease-and-desist order imposing a censure and will pay disgorgement and prejudgment interest of $132.7 million and a penalty of $37.3 million, “all of which will be returned to investors,” the SEC said.
The activity at issue occurred from 2011-15, according to the SEC, and ceased when BlueCrest billionaire owner Michael Platt announced in 2015 he was returning outside investors’ money and closing off BlueCrest to outside investment. The BSMA fund, and the issues surrounding it, were revealed in two separate reports by due diligence consultants in 2014.
“BlueCrest repeatedly failed to act in the best interests of its investors, including by not disclosing that it was transferring its highest-performing traders to a fund that benefitted its own personnel to the detriment of its fund investors,” said Stephanie Avakian, director of the SEC’s Division of Enforcement, in a statement released Tuesday. “This settlement holds BlueCrest responsible for its conduct and furthers the SEC’s goal of returning funds to harmed investors.”
According to the SEC’s order, BlueCrest’s use of the algorithm to conduct trades for the firm’s main fund created a conflict of interest because BlueCrest “could retain a greater percentage of performance fees generated” by the algorithm compared to live traders. BlueCrest continued to allocate a greater percentage of trades to the algorithm over four years, despite evidence it was underperforming by as much as 200 percent compared to live traders.
BlueCrest disclosed the existence of other proprietary funds under its management to investors but continually failed to disclose the existence of the BSMA fund, regulators said. In 2012, the firm began using a generic disclosure that did not name the BSMA fund but said BlueCrest “may” manage proprietary funds and, “will allocate resources as it in its sole discretion considers appropriate in managing [its] clients and any relevant proprietary and/or non-proprietary investment funds, vehicles or accounts in accordance with their respective investment objectives and strategies.”
These generic disclosures “would not have adequately alerted investors or prospective investors that BlueCrest actually managed a proprietary fund with a similar trading strategy” to its main fund, the SEC said. The firm continually failed to disclose the conflicts of interest the BSMA fund presented, the trader movements, or the existence of the algorithm being used to make an ever-increasing percentage of trades for the main fund. BlueCrest also failed to disclose these issues to its independent board for its main fund.
The fund’s existence only came to light when, in January 2014, a due diligence consultant saw a reference to the BSMA fund when conducting an onsite examination of BlueCrest. A BlueCrest employee told the consultant the fund was an internally managed account, and the company refused to answer the consultant’s follow-up questions, the SEC said.
In February 2014, the due diligence consultant published a report to clients downgrading BlueCrest’s rating due to its failure to report the BSMA fund existed, as well as the conflicts of interest that were present and that BlueCrest’s top traders were being shifted to trade on its behalf. BlueCrest would later reveal the existence of the algorithm to a second due diligence consultant, who issued a report dropping BlueCrest to its lowest possible rating.
BlueCrest’s main fund, which controlled nearly $14 billion in assets in December 2013, dropped to $9.4 billion a year later and to $2.2 billion at the end of 2015, when the firm stopped accepting external funds and returned investors’ money.
In a statement, BlueCrest said it is “pleased to have resolved this matter which primarily involved disclosures that were made more than five years ago.” The firm noted it has not managed the assets of outside investors since 2015, and “as such, today’s order does not relate in any way to our current business operations.”
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