The Securities and Exchange Commission (SEC) has charged New Jersey-based Chatham Asset Management and its founder, Anthony Melchiorre, in connection with improper trading of certain fixed income securities. Chatham and Melchiorre agreed to pay more than US$19.3 million in combined disgorgement, prejudgment interest, and civil penalties to settle the charges.
The SEC’s order finds that, from 2016 through 2018, one Chatham-advised client sold certain American Media (AMI) bonds while a different Chatham-advised client purchased the same bonds through various broker-dealers. Chatham, which had US8.6 billion in assets under management (AUM) at the end of 2022, engaged in these trades to address portfolio constraints such as industry or issuer fund concentration limits, meet investor redemptions, and allocate capital inflows and outflows. The order further finds that these trades were executed at prices Chatham and Melchiorre proposed and had the effect of increasing the price of the AMI bonds at a significantly higher rate than the prices of similar securities. Chatham’s and Melchiorre’s trading in the AMI bonds accounted for the vast majority of trading in those securities and therefore over time had a material effect on their pricing.
The SEC’s order also finds that Chatham and Melchiorre calculated the net asset values (NAVs), of their client funds’ holdings using pricing data that was based, in part, on the trading prices of the securities. As a result, 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, in turn, resulted in 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, dseputy 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 consented to the SEC’s order, without admitting or denying its findings, that they violated Section 206(2) of the Investment Advisers Act of 1940, and that they aided and abetted and caused violations of the Investment Company Act of 1944. Chatham and Melchiorre agreed jointly and severally to pay US$11 million in disgorgement and around $3.4 million in prejudgment interest. They also agreed to pay civil penalties of US$4.4 million and US$600,000, respectively. Finally, they agreed to prohibitions from serving in certain positions in the investment industry, pursuant to the Investment Company Act.
The SEC’s investigation was conducted by Daphne Downes, Brian Fitzpatrick, and Lindsay Moilanen, with assistance from Carina Chambarry and Raymond Wolff of the SEC’s Division of Economic and Risk Analysis.
