Hedge fund manager Chatham Asset Management and founder Anthony Melchiorre agreed to pay $19.4 million to settle Securities and Exchange Commission charges that the firm improperly traded fixed-income securities, the SEC announced Monday.
Chatham and Mr. Melchiorre consented to the SEC's order without admitting or denying its findings. The two parties also agreed jointly and severally to pay $11 million in disgorgement and about $3.4 million in prejudgment interest, and civil penalties of $4.4 million and $600,000, respectively.
From 2016 through 2018, one Chatham-advised client sold certain American Media Inc. bonds while a different Chatham-advised client purchased the same bonds through various broker-dealers, according to the SEC. Chatham engaged in these trades to address portfolio constraints such as industry or issuer fund concentration limits, meet investor redemptions, and allocate capital inflows and outflows, the SEC noted.
The SEC order found that these trades were executed at prices Chatham and Mr. Melchiorre proposed and had the effect of increasing the price of the AMI bonds at a significantly higher rate than the prices of similar securities. Chatham's and Mr. Melchiorre's trading in the AMI bonds accounted for the vast majority of trading in those securities and therefore over time had a material effect on their pricing, according to the SEC.
Moreover, the SEC found that Chatham and Mr. Melchiorre calculated the net asset values of their client funds' holdings using pricing data that was based, in part, on the trading prices of the securities. "As a result, during the relevant period, the NAVs of Chatham's clients were higher than they would have been if the subject trades were removed from the market for the AMI bonds, which, in turn, resulted in higher fees being charged to the clients," the SEC said.
Sanjay Wadhwa, deputy director of the SEC's enforcement division, said in a statement that Chatham's trading in AMI bonds had the effect of "increasing the prices of those generally illiquid securities in a way that was disconnected from economic reality."
A representative for Chatham said in an email that "Chatham sought, received and followed advice from an independent compliance consultant about the manner of executing the trading in question. The consultant reviewed Chatham's trading annually for compliance with applicable laws and did not alert the firm to any issues. Importantly, the trading occurred more than four years ago in funds that have since been closed. The matter has been resolved and we are focused on generating returns for our investors."