In an action brought by the SEC against a bond fund’s Chief Investment Officer for allegedly fraudulent statements regarding the fund’s risks, diversification and level of investor redemptions in the fund in violation of Section 10(b) and Rule 10b-5 of the 1934 Act, Section 17(a) of the 1933 Act, Section 34(b) of the Investment Company Act (“ICA”) and Section 206 of the Investment Advisers Act, a California federal court recently granted partial summary judgment dismissing many such claims, while permitting other claims to proceed to trial.
The court found that defendant’s description of the fund as “highly diversified” was not misleading and dismissed that claim because the undisputed evidence showed that the fund met the ICA statutory definition of issuer diversification, and defendant’s statement did not mention industry or sector diversification. While the court determined that defendant’s statements representing the fund as an ultra-short bond fund were not misleading, it found that questions of fact existed as to whether statements were misleading that the fund was hardly more risky than a money market fund and as to the purpose of the fund’s maintenance of a higher than normal cash balance.
The court denied summary judgment as to allegedly fraudulent statements failing to disclose the fund’s risks in advertisements and on the fund’s internal website, which statements were attributed only to the defendant, as well as certain of defendant’s oral presentations about the fund. The court also held that defendant could not be liable for allegedly fraudulent statements about the fund’s level of redemptions made internally to the fund adviser’s employees because there was no intent that those statements be transmitted to the public. However, the court denied dismissal of a claim regarding one such statement that the defendant characterized as one of several “sounding points to provide your clients,” which a financial consultant then repeated to a fund investor. The court further found that an issue of fact existed about the duty to disclose more detail about the fund’s holdings in Alt-A loans and denied the motion to dismiss that claim.
Proposed Settlement. The SEC subsequently announced a proposed settlement of the case, subject to court approval, enjoining defendant from future violations of the federal securities law and requiring a payment of $325,000 in penalties and disgorgement. Settlement of a related SEC administrative proceeding also would bar defendant from the securities industry and render him ineligible to hold certain positions associated with registered investment companies.
A Goodwin Procter partner served as an expert witness in the litigation.