Investing

SEC Issues Fraud Charges Over Native American Bonds

Chris Lange

Published: December 16, 2015 12:10 pm

Last Updated: January 13, 2020 4:01 pm

The U.S. Securities and Exchange Commission (SEC) announced fraud charges against a Stamford, Conn.-based investment advisory firm. Atlantic Asset Management (AAM) stands accused of investing clients in certain bonds with a hidden financial benefit to a broker-dealer connected to the firm.

In the complaint, the SEC alleges that the firm invested over $43 million of client funds in illiquid bonds issued by a Native American tribal corporation without disclosing the conflict of interest that the bond sales generated a private placement fee for the broker-dealer, the parent company of which partially owns AAM.

According to the SEC’s complaint filed in federal court in Manhattan:

• AAM is partially owned by an entity called BFG Socially Responsible Investing Ltd., although BFG’s ownership is not disclosed in AAM’s public SEC filings.
• At the suggestion of a BFG representative, AAM purchased the dubious, illiquid bonds on behalf of clients while aware that the sales would generate a private placement fee for a broker-dealer affiliated with BFG. AAM also was aware that proceeds from the bond sales were to be used to purchase an annuity provided by BFG’s parent company.
• An AAM officer evaluating whether or not to make the investments discussed balancing the “fiduciary duty” owed to the placement agent with the duty owed to AAM’s clients.
• AAM ultimately decided to put its owner’s financial interests first, approving the bond purchases without telling clients about the conflict of interest.
• Upon learning about the investments in the bonds, several AAM clients expressed concern over the bonds’ valuation and suitability. They demanded, unsuccessfully, that the investments be unwound.

Andrew M. Calamari, director of the SEC’s New York Regional Office, said:

As alleged, Atlantic violated a fundamental duty to its clients by placing its own financial interests ahead of client interests,” AAM’s clients should have been informed that the investments in illiquid bonds would financially benefit people with ownership control over AAM.