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December 28, 2012

LITIGATION AND ENFORCEMENT

ENFORCEMENT-SEC Bans Mutual Fund Manager for Violation of Fund Investment Objectives

By Lene Powell, J.D.

The Securities and Exchange Commission barred mutual fund manager Barry C. Ziskin from the securities industry for failing to follow the investment objectives of a stock mutual fund managed by his firm, Top Fund Management (TFM), leading to the fund's collapse. (In the Matter of Top Fund Management, Inc., et al., Dec. 21, 2012.)

The prospectus of Z Seven Fund (ZSF) stated that it sought long-term capital appreciation and restricted the use of options. In violation of the fund's investment objectives, beginning in September 2009, Ziskin and TFM invested ZSF in put options for speculative purposes, contrary to the fund's stated investment policy. The losses from options trading and the ensuing investor redemptions ultimately resulted in ZSF's liquidation in December 2010.

According to the SEC order settling administrative proceedings against TFM and Ziskin, disclosures in ZSF's prospectuses and statements of additional information provided that the fund could trade options only to hedge its portfolio. Because TFM and Ziskin traded put options in large amounts relative to the size of ZSF's equity portfolio, however, their strategy amounted to speculation rather than hedging. For example, ZSF's equity portfolio had a market value of $1,835,607 on July 6, 2010, but ZSF held enough option contracts to protect a portfolio worth $32,858,000, or nearly 18 times the value of the equity portfolio.

ZSF's options trading also caused the fund's performance to plummet. In October 2009, ZSF had net assets of $5.3 million, but over the next 15 months the fund suffered $3.7 million in losses from options. TFM and Ziskin misled ZSF investors by misrepresenting in a shareholder report that options trading was for hedging purposes.

The SEC order found that respondents TFM and Ziskin willfully violated the antifraud provisions of the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Advisers Act of 1940. Moreover, the order found that TFM and Ziskin violated Section 34(b) of the Investment Company Act of 1940 and caused ZSF to violate Section 13(a)(3) of that act. In the settlement, TFM and Ziskin agreed to cease and desist from committing or causing any violations and any future violations of these provisions. In addition, the order censured TFM and barred Ziskin from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, and prohibited him from serving as an officer, director or employee of a mutual fund.

The case is File No. 3-15154.

Enforcement

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