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From Securities Regulation Daily, August 21, 2013

Investment adviser misled fund board on algorithmic currency trading, SEC alleges

By Jay Fishman, J.D.

The Securities and Exchange Commission has instituted public administrative and cease-and-desist proceedings against a North Carolina investment adviser firm, Chariot Advisors, LLC, and its former owner, Elliott Shifman, for allegedly misrepresenting to Chariot Absolute Return Currency Portfolio’s board of directors the firm’s ability to conduct algorithmic currency trading, to ensure that the board would approve the firm’s contract to manage the fund (Release No. 34-70239, August 21, 2013).

Background. The case arose from the Enforcement Division’s Asset Management Unit’s focus on Investment Company Act Section 15(c), which requires a registered fund’s board to annually evaluate the fund’s advisory agreements. Shifman, in late 2008, proposed an advisory agreement with the board whereby his firm would become the investment adviser for the creation and management of the fund. The board, in response, told Shifman to provide certain information needed under Section 15(c) to evaluate the advisory agreement for approval.

Shifman provided this information in two PowerPoint presentations to the board, touting the nature, extent, quality, competitive benefits, and profits that algorithmic currency trading that the firm could provide the fund. The board then used Shifman’s claims as information for the fund’s Form N-1A and prospectus. However, the information contained the Form N-1A and prospectus was incorrect because the firm did not devise or otherwise possess any algorithms capable of engaging in currency trading; Shifman, in reality, hired an individual trader for the fund, who, for the first two months after the fund’s July 15, 2009, launch, did not use an algorithm for currency trading and was terminated in September 2009 for poor trading performance. The fund, a registered investment company as of June 30, 2009, was liquidated on August 31, 2011, to the investors’ detriment.

SEC allegations. The SEC alleged that the firm and Shifman violated Sections 15(c) and 34(b) of the Investment Company Act, as well as Sections 206(1), (2), and (4) of the Investment Advisers Act of 1940 and corresponding Rule 206(4)-8, by failing to disclose to the board or the fund’s investors that the firm did not have an algorithm capable of achieving the returns Shifman promised in his presentations.

Julie M. Riewe, the Co-Chief of the Asset Management Unit, said on bringing the case that “it is critical that investment advisers provide truthful information to the directors of the registered funds they advise” and that “both boards and advisers have fiduciary duties that must be fulfilled to ensure that a fund’s investors are not harmed.”

Proceeding determinations. The SEC requested that the proceedings determine: (1) whether the SEC’s allegations are true, providing the firm and Shifman with an opportunity to present defenses; (2) what, if any, remedial action is appropriate in consideration of the alleged violations, including disgorgement and civil penalties; and (3) whether the firm and Shifman should be ordered to cease and desist from violating the above-listed sections.

Companies: Chariot Advisors, LLC

MainStory: TopStory DirectorsOfficers InvestmentAdvisers InvestmentCompanies NorthCarolinaNews

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