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December 16, 2015 at 09:20 PM
Last month, Virtus Investment Advisers agreed to pay $16.5 million to settle with the SEC for negligently providing its fund investors with false performance data. Surprisingly, the SEC held Virtus responsible for the false performance data despite the fact that the data came from sub-advisor F-Squared Investments, and despite the fact that the SEC claimed F-Squared itself committed fraud and lied to Virtus about that performance data.
The Virtus case is the latest in a long line of cases in which the SEC seeks to hold investment advisors responsible for the statements or information of others. Some of those efforts have been more successful than others.
Holding an advisor responsible for statements “made” by the funds it advises became problematic after the Supreme Court ruled in a case called Janus Capital. In Janus, an investment advisor who drafted a prospectus for one of the funds it managed was held not liable for securities fraud in the funds’ prospectus. The Supreme Court concluded that “One who prepares or publishes a statement on behalf of another is not its maker.”
The SEC has attempted to sidestep the Janus problem by claiming that the limitation only applies in private lawsuits. That argument was quickly rejected in 2011 by one of the SEC’s own administrative law judges in proceedings stemming from investment advisor State Street Global Funds Management’s Limited Duration Bond Fund.
In that case, the SEC pursued two State Street employees for misrepresentations to investors included in a slide presentation. Specifically, the SEC claimed that one of the employees committed securities fraud because he presented to investors a slide showing a “typical” portfolio exposure to asset-backed securities of 55% when the fund fact sheet from around the same time of the presentation showed the portfolio’s actual exposure to ABS at that time was 100%.
