The Securities and Exchange Commission (SEC) has charged Chatham Asset Management and its founder, Anthony Melchiorre, for improper trading of certain fixed income securities.
Melchiorre and the New Jersey-based asset manager have agreed to pay over $19.3 million in combined disgorgement, prejudgment interest and civil penalties to settle the charges.
The SEC’s order finds that between the period of 2016 and 2018, one Chatham-advised client sold certain American Media, Inc. (AMI) bonds while another Chatham-advised client purchased the same bonds through various broker-dealers.
According to the SEC, Chatham engaged these trades to address portfolio constraints such as industry or issuer fund concentration limits, meet investor redemptions, and allocate capital inflows and outflows.
The trades were also found to have been executed at prices Chatham and Melchiorre proposed, which had the effect of increasing the price of the AMI bonds at a significantly higher rate than the price of similar securities.
The SEC stated that Chatham and Melchiorre’s trading in the AMI bonds accounted for the majority of trading in those securities and therefore over time had a material effect on their pricing.
In addition, the SEC’s order found that Chatham and Melchiorre calculated the net asset values (NAVs) of their client funds’ holdings using pricing data that was partly based on the trading prices of the securities.
This meant that during the relevant period, the NAVs of Chatham’s clients were higher than they would have been if the subject trades were removed from the market for the AMI bonds, which as a result, led to higher fees being charged to the clients.
“As our order finds, Chatham’s trading in AMI bonds had the effect of increasing the prices of those generally illiquid securities in a way that was disconnected from economic reality,” said Sanjay Wadhwa, deputy director of the SEC’s division of enforcement.
“We remain vigilant in rooting out such misconduct in the marketplace, including in the fixed income sector, where investments can be less liquid.”
Chatham and Melchiorre, without admitting or denying the SEC’s findings, consented to the order and agreed jointly and severally to pay $11 million in disgorgement and approximately $3.4 million in prejudgment interest.
The two parties also agreed to pay civil penalties of $4,400,000 and $600,000, respectively, alongside agreeing to prohibitions from serving in certain positions in the investment industry, in accordance with the Investment Company Act.