Catalyst Capital to Pay $10.5M for Misleading Investors

Without admitting or denying the findings, CCA and Szilagyi agreed to be censured, to cease and desist from future violations, and pay disgorgement of $8.2 million, plus prejudgment interest of $731,759, and a civil penalty of $1.3 million, the SEC said. Szilagyi, meanwhile, agreed to pay a civil penalty of $300,000. The payments will be placed in a fair fund to be distributed to affected investors, the SEC said.

CCA was “pleased to have resolved this matter regarding the Hedged Futures Strategy Fund,” Szilagyi told ThinkAdvisor by email Tuesday. He added: “Catalyst is committed to best-in-class services and its award-winning funds speak for themselves. Here, as the SEC settlement recognizes, the company voluntarily retained an outside consultant in 2017 to review and evaluate its risk procedures and practices and made structural enhancements to its risk management and supervisory functions. These regulatory settlements, and a court’s dismissal of a federal class action regarding the Hedged Futures Strategy Fund in June 2019, allow the company to focus on what it does best: Offering unique investment products to meet the needs of discerning financial advisors and their clients.”

However, Szilagyi declined to comment on the SEC’s suit against Walczak. The CEO referred ThinkAdvisor to the senior portfolio manager’s lawyer, Zachary Ziliak, who didn’t immediately respond to a request for comment.

The SEC’s complaint against Walczak alleged that he violated the antifraud provisions of federal securities laws and sought a permanent injunction, disgorgement of ill-gotten gains and a civil penalty. The SEC alleged that he told investors the fund “employed a risk management strategy involving safeguards to prevent losses of more than 8%, when in fact no such safeguards limited losses and Walczak did not otherwise consistently manage the fund to an 8% loss threshold.”

The fund “ultimately lost approximately 20% of its net asset value between December 2016 and February 2017, including more than 15% in February alone,” the SEC said in the suit. The fund’s total loss of more than $700 million was “comparable to the $667 million loss forewarned by the Fund’s assistant portfolio manager,” the SEC noted.

“Fund managers must be truthful and transparent when describing their risk management procedures,” C. Dabney O’Riordan, co-chief of the SEC Enforcement Division’s Asset Management Unit, said in a statement,

Daniel Michael, Chief of the Division’s Complex Financial Instruments Unit, added, “Here, CCA’s misrepresentations, and Walczak’s alleged departure from his stated approach to managing risk, deprived investors of accurate information about an important aspect of the fund’s management.”