SEC Charges Portfolio Manager with Aiding and Abetting Rule 22c-1 Violation under the 1940 Act

December 26, 2012

An Administrative Law Judge issued an order finding that Lisa B. Premo willfully aided and abetted and caused Evergreen Investment Management Company, LLC’s violations of Sections 206(1) and 206(2) of the Advisers Act and Evergreen’s Ultra Short Opportunities Fund’s  violation of Rule 22c-1(a) under the 1940 Act.

The SEC had found that Premo failed to disclose to Evergreen’s valuation committee (Valuation Committee) that a bond (a tranche of a debt security issued by NovaStar) in the Ultra Short Fund’s portfolio was subject to:

  • a notice of potential default,
  • an acceleration or alteration in cash flows, and
  • a missed interest payment.

This failure, in the SEC’s view, caused Evergreen to breach its fiduciary duty to the fund. In addition, the SEC stated that the failure to disclose this material information inflated the net asset value (NAV) of the Ultra Short Fund portfolio, resulting in the Ultra Short Fund engaging in sales, redemptions and purchases of shares that did not reflect the fund’s true NAV.

The SEC’s administrative order extensively referenced Tamar Frankel, who is a professor of law at Boston University School of Law and was the SEC’s expert witness in the proceeding. Frankel viewed Premo as having two roles vis-a-vis the Valuation Committee:  

  • a voting member of the Committee; and
  • a portfolio manager where she had a duty to provide the Committee all relevant and material information regardless of her personal evaluation of the information.

Frankel testified that the notice of potential default, acceleration in cash flows and missed interest payment were all relevant and material information that Premo had a duty to disclose to the Valuation Committee as soon as she learned of them. She stated that this duty existed whether or not members of the Valuation Committee already knew the information. In her view, the requirement by Section 22(c) of the 1940 Act and Rule 22c-1 to fair value securities is the source of the duty. 

Frankel stated that Premo played a pivotal role in deciding what information went to the Valuation Committee, and that she violated her duty to transfer information and instead set herself up as the judge of its significance. She believed that Premo had a duty to inform the Valuation Committee of the acceleration because it was a material development and the Valuation Committee required this information to evaluate the security in terms of the probability that the issuer’s security holders would receive less than the full amount they would otherwise have been entitled to, or that they would receive the full amount, but at a much later date than originally anticipated. She believed that the acceleration reduced the value of the Ultra Short Fund’s position in the bond at question and that Premo caused the Valuation Committee to misevaluate the bond in violation of its legal duties. 

Frankel further deemed Premo’s failure to inform the Valuation Committee that the issuer of the bond had failed to make a quarterly payment as quickly as possible to be a breach of Premo’s disclosure obligation that caused the Valuation Committee to breach its duty to fair value the bond. As the portfolio manager of the Ultra Short Fund, Premo had a fiduciary duty to make full and fair disclosure of all material facts to the board of the fund at the Valuation Committee meeting. Frankel observed a pattern of failure to disclose information to the Valuation Committee.

Please click here to access the administrative action.


Enforcement Actions, Investment Advisers, Investment Companies