U.K. Portfolio Manager Charged with Aiding and Abetting Section 17(d) Joint Transaction Violation

June 2, 2014

The SEC brought an administrative action against Christopher B. Ruffle in connection with a prohibited joint transaction violating Section 17(d) of the 1940 Act and Rule 17d-1 thereunder.  The SEC stated that in April 2009, in the midst of the financial crisis, Martin Currie, a U.K.-based group of investment managers, used its U.S.-registered investment company client, the China Fund, Inc. (China Fund), to invest in a convertible bond transaction that directly benefited another Martin Currie client, a hedge fund called the Martin Currie China Hedge Fund L.P. ( “Hedge Fund”). The Hedge Fund, an affiliated person of the China Fund, had previously acquired significant, and largely illiquid, exposure in the form of bonds to a single Chinese company and required liquidity to satisfy mounting redemption requests from its investors.

Section 17(d) of 1940 Act prohibits any affiliated person of a registered investment company or any affiliated person of such affiliated person, acting as principal, from effecting any transaction in which such registered investment company is a joint or a joint and several participant with such affiliate in contravention of such rules and regulations as the SEC may prescribe. Section 17(d) of 1940 Act is intended to limit or prevent participation by such registered company on a basis different from or less advantageous than that of another participant. Rule 17d-1 under the 1940 Act prohibits any such affiliate from participating in any joint enterprise, other joint arrangement, or profit-sharing plan (called a joint arrangement) unless it obtains an order from the SEC.

Ruffle was formerly the lead portfolio manager for the China Fund and the Hedge Fund. Ruffle joined Martin Currie in 1994 as a member of the emerging markets team and, starting in 2002, headed the firm’s China operations in Shanghai.

The Hedge Fund purchased equity shares in Jackin International Holdings (Jackin) in 2003. In June 2007, Ruffle caused the Hedge Fund to purchase bonds from Jackin for a principal amount of HK$78 million ($10 million) that bore a coupon rate of (Jackin 10% Bonds). These bonds were secured by equity shares of Afex, a subsidiary of Jackin, and also included detachable warrants that were convertible into Jackin stock.

As the global financial crises deepened in 2008, the Hedge Fund faced a significant increase in redemption requests by investors. To meet those requests, Ruffle began selling down the liquid portion of the Hedge Fund’s portfolio.

According to the SEC, Ruffle negotiated a convertible bond transaction and, together with others at Martin Currie, caused the China Fund to invest in Ugent, a subsidiary of Jackin where the China Fund bought HK$177 million ($22.8 million) in Ugent bonds that were convertible to common shares representing approximately 30% of Ugent. The SEC stated that Ugent then loaned 44% of the investment proceeds ($10 million) to its parent, Jackin, to redeem the Hedge Fund’s Jackin 10% Bonds in full. The convertible bond deal, according to the SEC, also enabled Jackin to service its debt payments to the Hedge Fund on other Jackin bonds owned by the Hedge Fund. In the SEC’s view, the deal alleviated the Hedge Fund’s liquidity and exposure concerns.

The SEC noted that at a quarterly board meeting of the China Fund, Ruffle presented a report on the Ugent convertible bond transaction. According to the SEC, the report stated that the China Fund “will buy a convertible bond from Ugent, to provide working capital for business expansion,” but omitted the fact that 44% of the proceeds would be used to redeem the Jackin 10% Bonds. Although this was the last board meeting prior to the Ugent deal closing, the SEC stated that Ruffle failed to disclose the redemption of the Jackin 10% Bonds at the meeting.

In November 2010, the board of the China Fund wrote down the value of the unlisted convertible bonds to zero. In April 2011, the China Fund eventually sold the convertible bonds for 55% of their face value.

The SEC characterized the deal as a structured crossing transaction in which the China Fund transferred $10 million in cash to the Hedge Fund, an affiliated client through Jackin. The SEC found that Ruffle willfully aided and abetted and caused violations of Section 17(d) of the 1940 Act and Rule 17d-1 by causing the Hedge Fund, an affiliate of the China Fund, to participate in a joint arrangement with the China Fund without an SEC order when he knew that the transaction involved the redemption of the Jackin 10% Bonds and knew (or was reckless in not knowing) that the transaction raised affiliation concerns.

Click http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370541746247 to access the administrative order.


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