SEC Concludes that an Advisor’s Undisclosed Risks Harmed Investors

According to a Securities and Exchange Commission (SEC) release, the SEC found that a fund advisor attempted two strategies to enhance returns — writing out-of-the money put options and shorting variance swaps. This exposed the investors to additional undisclosed risks and caused the investors to lose more than $45 million in September and October 2008, which was approximately 45 percent of the investors’ net assets.


Fund adviser and administrator Claymore Advisors LLC, which is located in Lisle, Ill., and the sub-adviser responsible for managing the investors’ portfolio, St. Louis-based Fiduciary Asset Management LLC (FAMCO), agreed to settle the SEC’s charges. The SEC’s case continues against former FAMCO employees Mohammed K. Riad of Clayton, Mo., and Kevin Timothy Swanson of St. Louis, the co-portfolio managers who allegedly made misleading statements in fund’s periodic reports about the two strategies’ contribution to the fund’s performance and about the fund’s exposure to downside risk.
“When discussing fund performance and risks, fund advisers must candidly and accurately portray how the fund is being managed. The disclosures in this case fell short of the mark,” said Robert J. Burson, Senior Associate Regional Director of the SEC’s Chicago office.
“Derivatives have the potential to vastly increase the amount of leverage and exposure for a fund. The fund was exposed to substantial undisclosed risks as a result of its use of these complex financial instruments, and investors weren’t sufficiently told,” said Kenneth Lench, Chief of the SEC Enforcement Division’s Structured and New Products Unit.
Wittenberg Law has substantial experience representing clients in connection with derivatives and related investment products. These products are highly complex, but appropriate due diligence can reveal many issues that an advisor may chose not to disclose to investors. In addition, Wittenberg Law has litigated and arbitrated complex securities cases and has achieved excellent results. Be a prudent investor, contact Wittenberg Law at (310) 295-2010 to help you level the investment playing field.