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Securities and Exchange Commission (SEC) Files Complaint Against Money Market Fund Adviser and Portfolio Manager

The SEC instituted cease-and-desist proceedings against Ambassador Capital Management, LLC, a Detroit-based registered investment adviser, and Derek Oglesby, one of its portfolio managers, in connection with the management of the Ambassador Money Market Fund, a prime money market fund that was liquidated in June 2012. From time to time, more than half of the shareholders’ investments in the fund came from just two municipalities, the City of Detroit and Washtenaw County, Michigan.

A money market fund may only invest in securities determined by the fund’s board to present minimal credit risk. The order alleges that Ambassador and its portfolio manager repeatedly made false statements to the fund’s board about the credit risk of the securities they purchased for the fund’s portfolio, the fund’s exposure to the Eurozone credit crisis of 2011 and the diversification of the fund’s portfolio.

“Money market fund managers must not hide the ball from a fund’s board,” said George S. Canellos, co-director of the SEC’s Enforcement Division. “Ambassador Capital Management and Oglesby weren’t truthful about whether securities in the portfolio threatened to destabilize the fund, and they failed to operate under the strict conditions designed for money market fund managers to limit risk exposure and maintain a stable price.”

The enforcement action stems from an ongoing analysis of money market fund data by the SEC’s Division of Investment Management. 

According to the SEC’s order, the fund consistently had generated a return which significantly exceeded that for the prime money market funds in its peer group. The fund also owned securities issued by Dexia, SA, a French-Belgian bank, after it was taken into receivership by France, Luxembourg and Belgium in October 2011. Further, the fund held the asset backed commercial paper of a troubled German bank and two Italian issuers. Given these concerns, the SEC conducted a compliance examination of the fund in November 2011. During that examination, the Wall Street Journal reported that Moody’s issued negative ratings actions on 12 German banks, two of which sponsored asset backed commercial paper held by the fund. However, Ambassador’s chief investment officer allegedly was unaware of these downgrades. The SEC referred the matter to the SEC Enforcement Division’s Asset Management Unit for investigation.

The SEC alleges that Ambassador and Mr. Oglesby misrepresented or withheld critical facts from the fund’s board, such as:

  • The firm’s self-imposed holding period restrictions were frequently exceeded for securities in the fund’s portfolio.

  • The fund regularly purchased securities that had greater than minimal credit risk under the firm’s own guidelines. Ambassador allegedly failed to comply with Rule 2a-7 under the Investment Company Act by repeatedly purchasing portfolio securities without making a determination that the securities posed a minimal credit risk and by failing to keep a written record of its analysis. Ambassador’s credit analyses concluded that many of the fund’s securities presented “risk,” “some risk” or “moderate risk.”

  • Throughout the Eurozone credit crisis in 2011, the fund continually purchased securities issued by Italian-affiliated entities despite Mr. Oglesby’s claim that Ambassador was trying to stay away from Italian exposure and would unload even secondhand exposure to the Italian market.

  • The fund’s portfolio was not sufficiently diversified.

According to the SEC’s order instituting administrative proceedings, Ambassador also caused the fund to deviate from the risk-limiting provisions of Rule 2a-7. The SEC alleges that since the fund failed to follow 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 and the fund also should not have been represented to investors as a money market fund.

“Compliance with the risk-limiting provisions is critically important for a money market fund. Deviations can have serious consequences for pricing of fund shares and how the fund markets itself to investors,” said Marshall S. Sprung, co-chief of the SEC Enforcement Division’s Asset Management Unit.

Finally, the SEC alleges that Ambassador also failed to conduct an appropriate stress test of the fund’s portfolio. Rule 2a-7 requires money market funds to implement written procedures providing for periodic stress testing of the fund’s ability to maintain a stable NAV in light of several hypothetical scenarios. The complaint alleges that the fund did not fully implement written stress testing procedures until May 2012. Ambassador also allegedly failed to perform adequate stress testing by failing to include some hypothetical scenarios required by Rule 2a-7 in its stress testing of the fund.

The SEC’s order alleges that Ambassador violated the antifraud provisions of the Advisers Act and Mr. Oglesby aided and abetted the firm’s violations. They allegedly caused violations of the pricing, naming and recordkeeping provisions of the Investment Company Act, and the firm caused violations of the compliance rule.

A hearing has been scheduled for May 5, 2014.

Sources: In the Matter of Ambassador Capital Management, LLC and Derek H. Oglesby, Administrative Proceeding File No. 3-15625 (November 26, 2013); In the Matter of Ambassador Capital Management, LLC and Derek H. Oglesby, Administrative Proceeding File No. 3-15625 (January 7, 2014). 

Copyright © 2020 Godfrey & Kahn S.C.National Law Review, Volume IV, Number 44

TRENDING LEGAL ANALYSIS


About this Author

Susan Hoaglund, Investment Management Attorney, Godfrey Kahn law firm
Member

Susan Hoaglund is a member of the Investment Management Practice Group. Susan provides advice to investment advisers, investment companies, broker-dealers and banks regarding legal, regulatory and compliance matters.

262-951-7136
Chris Cahlamer Investment Management Attorney
Shareholder

Chris Cahlamer is the team leader of the firm’s Investment Management Practice Group, where he practices in investment management and securities law, focusing on investment companies, investment advisers, regulatory examinations, new product development, SEC compliance and reporting obligations, CCO support, private fund formation and operation, investment company reorganizations, investment advisor mergers and acquisitions, and general corporate and board fiduciary issues.

Chris earned his law degree, summa cum laude, at Marquette University Law School. While there, he received the Corporate Practice Institute Award and served as senior articles editor on the Marquette Law Review. He completed his undergraduate education at St. Norbert College, graduating as a member of the honors program and earning his bachelor’s degree, summa cum laude, in international economics and political science.

Chris is a member of the State Bar of Wisconsin and the American Bar Association.

414-287-9338
Carol A. Gehl, Securities Law Attorney, Godfrey and Kahn law firm
Shareholder

Carol Gehl is a shareholder and the team leader of the Securities Practice Group in the Milwaukee office.

Carol’s practice is focused on investment management entities, including mutual funds, hedge funds, investment advisers and broker-dealers throughout the nation. During the last number of years, Carol has facilitated the organization of numerous mutual funds, hedge funds and investment advisers; assisted in SEC and FINRA examinations of regulated entities; provided ongoing advice to mutual fund Boards of Directors; and assisted with several mergers of investment advisers and...

414-287-9255