The SEC charged Ambassador Capital Management (Ambassador), a Detroit-based investment adviser to money market and other funds, and Derek Oglesby, a portfolio manager of Ambassador, for deceiving the trustees of a money market fund and failing to comply with rules that limit risk in a money market fund’s portfolio.
Under Rule 2a-7 under the 1940 Act, a money market fund must comply with numerous conditions, including only investing in securities determined by the fund’s board of trustees to present minimal credit risk. The SEC alleges that Ambassador and Oglesby repeatedly made false statements to trustees of the Ambassador Money Market Fund about the credit risk in the securities they purchased for its portfolio. Trustees, according to the SEC, also were misled about the money market fund’s exposure to the Eurozone credit crisis of 2011 and the diversification of the fund’s portfolio.
The SEC uncovered the alleged wrongdoings from analyzing money market fund data required to be filed by all money market funds with the SEC. In this case, the performance of the Ambassador Money Market Fund was identified as consistently different from the rest of the market in terms of gross yield.
The SEC found that Ambassador and Oglesby misrepresented or withheld critical facts from the fund’s trustees including the following:
- Ambassador’s self-imposed holding period restrictions were frequently exceeded for securities in the fund’s portfolio.
- The money market fund regularly purchased securities that had greater than minimal credit risk under the firm’s own guidelines.
- Throughout the Eurozone credit crisis in 2011, the money market fund continually purchased securities issued by Italian-affiliated entities despite Oglesby’s claim that Ambassador was trying to stay away from Italian exposure and would unload even secondhand exposure to the Italian market.
- The money market fund’s portfolio was not sufficiently diversified and thus had not reduced risk exposure as portrayed to trustees.
According to the SEC, Ambassador also caused the fund to deviate from the risk-limiting provisions of Rule 2a-7 and that firm failed to conduct an appropriate stress test of the fund’s portfolio. Since the Ambassador Money Market Fund failed to follow the risk-limiting provisions of Rule 2a-7, it was not permitted to use the amortized cost method of valuing securities under which it priced its securities at $1 per share. Thus, it should not have been represented to investors as a money market fund.
Please click here for the administrative order.