HINSDALE, Ill. -- The partners of a small Illinois money management company are claiming no harm, no foul as a defense against SEC allegations that the firm illegally directed trades for a "large institutional client" to a former partner's brokerage company for repayment of a debt.
The partners of MPI Investment Management, Hinsdale, did not disclose this "material conflict of interest" to the client or on the ADV form, thus violating sections 206(1), 206(2) and 207 of the Investment Advisers Act of 1940, the Securities and Exchange Commission alleges.
An attorney for MPI said the trades involved a customer who gave the firm permission to direct the trades. The SEC and MPI's attorney declined to identify the institutional investor.
The SEC alleges MPI partners David Pequet and Ashok Shende owed two departing partners $162,500, but lacked the cash to pay them. Messrs. Pequet and Shende reached an agreement with the unnamed partners in 1993 to pay a portion in cash and pay the balance in directed commissions.
The trades occurred from 1993 through 1996, the SEC alleges.
"MPI benefited from these agreements in that it did not need to pay the former partners with cash, but instead, could simply direct trades of the institutional client to the former partners' brokerage firms in order to compensate them for their partnership interests," the complaint states.
MPI eventually disclosed the arrangement with one of the former partners on its ADV form filed with the SEC after August 1996. The partners, however, never disclosed the arrangement to the client, which terminated the firm in February 1996, the SEC complaint states.
"MPI, as an investment adviser, had a fiduciary duty to fully disclose to its clients all possible material conflicts of interests," states the SEC complaint. "The debt forgiveness which MPI received constituted an economic benefit to MPI, which needed to be disclosed to MPI's clients.
"MPI harmed its clients, since they did not have the opportunity to object to MPI's arrangements and to protect themselves against MPI's incentive to effect transactions in their accounts without regard to their needs."
Andrew Munro, attorney for Messrs. Pequet and Shende, said there was no harm to the client, and that the institution knew about the arrangement.
The only truthful allegation is that the partners failed to disclose the arrangement on the ADV form, according to Mr. Munro.
"There was a commission this customer was willing to pay, and it never got charged more than it had agreed to be charged," he said.
"So, there was no harm to the customer," said Mr. Munro. "The whole crux of this is a failure to disclose this in the ADV."
According to Mr. Munro, the SEC rules about disclosure were confusing in 1993. The defendants, nevertheless, sought and received advice from their lawyer about how to proceed, said Mr. Munro.
"It was unfortunate and was corrected in 1996," he said. "Full disclosure was made in the ADV."
MPI is a large-cap equity manager. The firm has $58 million total under management, $36 million for tax-exempt investors.