Macquarie Investment Management to Pay $79.8 Million for Overvalued CMOs and Unlawful Cross Trades

Posted on October 11th, 2024 at 12:03 PM
Macquarie Investment Management to Pay $79.8 Million for Overvalued CMOs and Unlawful Cross Trades

From the desk of Jim Eccleston at Eccleston Law

The U.S. Securities and Exchange Commission (SEC) has charged Macquarie Investment Management Business Trust (MIMBT) with overvaluing collateralized mortgage obligations (CMOs) and executing unlawful cross-trades that favored certain clients. MIMBT will pay a total of $79.8 million to settle the charges, which include a $70 million penalty, plus $9.8 million in disgorgement and prejudgment interest.

The DI Wire reports that an investigation revealed that between January 2017 and April 2021, MIMBT overvalued approximately 4,900 illiquid CMOs held across 20 advisory accounts, including 11 retail mutual funds. MIMBT utilized a third-party pricing service intended for larger, institutional-sized lots, even though it held smaller "odd lot" CMO positions. This mispricing resulted in inflated valuations, overstating the performance of client accounts.

To mitigate losses for redeeming investors, MIMBT arranged cross-trades, including 465 internal trades and 175 dealer-interposed trades. According to DI Wire, those trades allegedly favored certain clients by selling overvalued CMOs at prices above the current market, resulting in retail mutual funds absorbing losses that should have been borne by other accounts.

Without admitting or denying the SEC’s findings, MIMBT agreed to a cease-and-desist order, a censure, and a $79.8 million payment. The firm will also hire a compliance consultant to review its policies on CMO valuation and cross-trading.

 

Eccleston Law LLC represents investors and financial advisors nationwide in securities, employment, transition, regulatory, and disciplinary matters.

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