SEC Charges Macquarie Investment Management Business Trust with $79.8 Million Fraud Settlement

The Securities and Exchange Commission (SEC) announced today that Macquarie Investment Management Business Trust (MIMBT), a registered investment adviser, has agreed to pay $79.8 million to settle charges of fraud. The case involves the overvaluation of illiquid assets and the execution of unlawful cross trades that favored certain clients over others.

According to the SEC's order, from January 2017 through April 2021, MIMBT managed the Absolute Return Mortgage-Backed Securities strategy, which primarily invested in mortgage-backed securities, collateralized mortgage obligations (CMOs), and treasury futures. The firm is accused of overvaluing approximately 4,900 largely illiquid CMOs held in 20 advisory accounts, including 11 retail mutual funds.

The SEC found that MIMBT valued small-sized, "odd lot" CMO positions using prices obtained from a third-party pricing service intended for institutional lots only. This practice led to inflated valuations, as the pricing service did not provide separate valuations for odd lots, which typically trade at a discount to larger, institutional-sized positions.

Eric I. Bustillo, Director of the SEC's Miami Regional Office, stated, "It is alarming that a fiduciary took advantage of retail mutual funds it advised and executed unlawful cross trades to mitigate its overvaluation of fund assets. Utilizing a third-party pricing service does not negate an investment adviser's obligation to value assets accurately."

The order also details MIMBT's attempts to minimize losses to redeeming investors through questionable cross-trading practices:

1. MIMBT executed 465 internal cross trades between a selling account and 11 retail mutual funds above independent current market prices. This resulted in the retail mutual funds absorbing losses that would have otherwise been borne by the selling account in a market sale.
2. The firm arranged approximately 175 dealer-interposed cross trades, temporarily selling odd lot CMO positions to third-party broker-dealers and then repurchasing those same positions for allocation to one or more affiliated client accounts. This provided liquidity to redeeming investors in an illiquid market, often at above-market prices.

Settlement Details

Without admitting or denying the SEC's findings, MIMBT has agreed to:

• Pay a $70 million penalty
• Pay disgorgement and prejudgment interest totaling $9.8 million
• Accept a censure
• Cease and desist from further violations of the charged provisions
• Retain a compliance consultant to conduct a comprehensive review of its policies and procedures relating to CMO valuation, associated liquidity risks, and cross trading

The SEC's order found that MIMBT violated antifraud and compliance provisions of the Investment Advisers Act of 1940 and certain provisions of the Investment Company Act of 1940.

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