Monday Guggenheim Partners agreed to pay a $20 million penalty to the Securities and Exchange Commission for what looks like some pretty minor stuff. The SEC says that Guggenheim overcharged one client by $6.5 million over several years, but then it figured out the mistake on its own and gave the money back. (Guggenheim didn’t admit or deny wrongdoing.)
It had a compliance policy that seems to have forbidden flying on clients’ private jets, but sometimes its employees flew on clients’ private jets. And it “breached its fiduciary duty by failing to disclose a $50 million loan that one of its senior executives received from an advisory client”:
A senior Guggenheim executive obtained the loan in July 2010 so he could fund his personal investment in a corporate acquisition led by Guggenheim’s parent company. In August 2010, Guggenheim invested certain of its advisory clients in two transactions in which the client who made the loan also had invested, but on different terms. The Guggenheim executive and the client who made the loan discussed the two transactions and the Guggenheim executive played a role in structuring them.
Well that seems, you know, baddish? Medium-bad? Obviously if one client — the SEC order calls him “Client A” — gave a Guggenheim executive a sweetheart loan, and Guggenheim then gave him preferential treatment at the expense of its other unwitting clients, that would not be great. But if that had happened you might expect the SEC to say so, and it didn’t.
The loan doesn’t seem to have been an especially sweet deal, insofar as the executive “refinanced the loan with a different lender” just over 14 months after taking it out. One of the transactions — Client A had some investments in a private company (“Company 1″), didn’t like them and ended up swapping them for more senior interests, giving the Guggenheim clients more junior interests — seems to have been negotiated mostly before the Client A loan, and not by the executive who had the loan.
The other seems to have involved basically warehousing some private company warrants in five Guggenheim accounts for a couple of months until their issuer worked out a deal with Client A; ultimately Client A bought the warrants from the Guggenheim clients at the price they’d paid, plus interest. That is a little fishy — normally when you invest in private company warrants you expect more than a fixed-income return — but doesn’t seem to have done anyone much harm.
“There is no allegation by the SEC that any Guggenheim client was financially harmed,” says Guggenheim, which calls the whole thing “a potential conflict of interest related to a loan to an executive in GPIM” (Guggenheim Partners Investment Management, and emphasis added). The SEC doesn’t really seem to disagree.
So why was the fine so big? The mystery might get cleared up a bit if you figure out who Client A is. Last week Charlie Gasparino reported that Guggenheim was “scrambling to put together a civil settlement with the Securities and Exchange Commission that would end a probe that originated with a regulatory investigation into the firm’s dealings with one of its most prominent clients—former junk bond king Michael Milken.”
When that investigation first came to light in February 2013, Bloomberg reported that it was about “whether Milken, an investor in the $170 billion asset-management firm, has in effect managed other clients’ money by playing an active advisory role to the firm.” Milken was banned from the securities industry a while back, but he remains rich and, you know, good at securities things. If he is investing alongside other Guggenheim clients in private investments, that’s fine. If he’s involved in structuring those investments, as a client negotiating with his advisers, that’s … fine? But if he’s involved in structuring those investments as an adviser to the other clients – if, for instance, he’s getting paid for his expertise — then it’s not. As Fortune reported in February 2013:
The SEC is looking at whether Milken is violating that ban by effectively acting as a manager of Guggenheim investments beyond his own, according to sources familiar with the investigation. The question is: Has Milken provided advice in exchange for some form of compensation?
But that is itself a vague question not susceptible to clear answers. Guggenheim in the past has said that “Mr. Milken, while a valued client, does not have an ownership or managerial role in the firm in any way, shape or form.”
The obvious guess here would be that Client A is Milken. Spokespeople for Guggenheim, the SEC and Milken all declined to comment, and the SEC order is written with more than the usual attention to vaguing up the anonymous parties. But there are enough clues that I at least am satisfied that Client A is Milken. One company mentioned in the SEC order (“Company 2″) did a bond deal underwritten by Guggenheim in 2010, and a subsequent warrants-for-preferred-and-common-stock swap on February 18, 2011. Diamond Resorts seems to be the only company that matches that description. The