Hedge fund Chatham Asset Management and its founder, Anthony Melchiorre, have agreed to pay over $19 million to settle US Securities and Exchange Commission (SEC) allegations of improper bond trading in American Media Inc., the media company that once owned the National Enquirer.
The SEC claims the trades were executed at prices that significantly inflated the value of the bonds compared to similar securities. Neither Chatham nor Melchiorre admitted to or denied the SEC’s allegations.
SEC Alleges Trades Boosted Illiquid American Media Bonds
Chatham Acquired Majority Stake in American Media’s Parent Company in 2014
The main Wall Street regulator said on Monday that Chatham and Melchiorre traded bonds in American Media, the publisher known for putting out the National Enquirer before the tabloid’s recent sale, in a way that resulted in one of its funds selling the securities and another one purchasing the same assets. The transactions boosted the price in bonds from American Media, which were generally illiquid, according to the agency. The firm is now known as a360 Media.
Chatham acquired a majority stake in American Media’s parent company in 2014. The firm said in a statement that Chatham sought, received, and followed advice from an independent compliance consultant for the trades at issue. “The consultant reviewed Chatham’s trading annually for compliance with applicable laws and did not alert the firm to any issues,” the statement said. “Importantly, the trading occurred more than four years ago in funds that have since been closed. The matter has been resolved, and we are focused on generating returns for our investors.”
Chatham and Melchiorre Pay Penalties, Disgorge Gains, and Agree to Industry Bars
SEC Alleges Violations Occurred Between 2016 to 2018
Chatham and Melchiorre agreed to pay penalties of $4.4 million and $600,000, respectively, in the settlement. They will also pay back $14.3 million in gains and interest from the trades. In addition to the monetary penalties, both Chatham and Melchiorre agreed to bars from the mutual fund industry — which Chatham had already exited — as a condition of the settlement.
The SEC alleged that violations occurred between 2016 and 2018. These bonds were illiquid, traded over-the-counter, and mostly owned by Chatham entities, according to the agency. But some Chatham funds allowed investors to pull their money any time, and some had restrictions on how much of the fund could be invested in one industry. This meant that Chatham would have to sell some American Media bonds from time to time.
SEC Claims Chatham and Melchiorre Saw Bonds as Good Investments Despite Redemptions
Clients Paid Chatham an Estimated $11 Million in Additional Fees as a Result of Trades
Regardless, Chatham and Melchiorre still considered the bonds to be good investments even when they needed to meet redemptions, the SEC said. The regulator said Chatham sold the debt to brokers at prices proposed by Melchiorre, who then bought the bonds again with a different Chatham entity, sometimes at a slightly higher price to compensate the broker. This approach allowed the bonds to remain within the Chatham network, while simultaneously increasing their value and consequently the fees generated by Chatham funds. The SEC estimates that clients paid Chatham an additional $11 million in fees as a direct result of these trading activities.
Lessons Learned and Future Implications for the Financial Industry
Strengthening Compliance and Monitoring Practices
This case highlights the importance of robust compliance and monitoring practices within the financial industry. While Chatham claims to have sought and followed advice from an independent compliance consultant, the alleged improper trading activities went undetected. In light of this, financial firms should review and strengthen their internal controls and risk management processes to ensure full compliance with securities regulations.
Ensuring Transparency in Illiquid and Over-the-Counter Trading
Illiquid and over-the-counter assets, such as the American Media Inc. bonds, can be more susceptible to price manipulation due to their limited trading volume. To mitigate this risk, regulators and financial institutions should work together to promote transparency and fair pricing practices in these markets. This can be achieved through increased reporting requirements, improved market surveillance, and the implementation of industry best practices for trading illiquid assets.
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Investor Awareness and Due Diligence
The Chatham case also underscores the importance of investor awareness and due diligence. Investors must be vigilant in scrutinizing the performance and fee structures of the funds they invest in, as well as the integrity of the investment managers. By actively engaging in due diligence, investors can better protect themselves from potential misconduct and ensure they are making informed investment decisions.
In conclusion, the Chatham Asset Management and Anthony Melchiorre case provides valuable lessons for the financial industry, emphasizing the need for stringent compliance, enhanced transparency, and investor diligence. As the industry moves forward, it must learn from cases like these to prevent similar occurrences in the future and maintain the integrity of the financial markets.
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Frequently Asked Questions
1. What were the allegations against Chatham Asset Management and its founder, Anthony Melchiorre?
The SEC alleged that Chatham and Melchiorre improperly traded bonds in American Media Inc., inflating their value compared to similar securities. The agency claimed that the bond trading activities violated securities regulations, leading to an investigation and settlement.
2. How much did Chatham and Melchiorre agree to pay in the settlement?
Chatham Asset Management and Anthony Melchiorre agreed to pay over $19 million in the settlement. This amount includes penalties of $4.4 million and $600,000, respectively, and $14.3 million in disgorged gains and interest.
3. Did Chatham and Melchiorre admit to any wrongdoing in the case?
No, neither Chatham nor Melchiorre admitted to or denied the SEC's allegations as part of the settlement agreement.
4. What are the additional consequences for Chatham and Melchiorre besides the monetary penalties?
In addition to the monetary penalties, both Chatham and Melchiorre agreed to bars from the mutual fund industry as a condition of the settlement. It should be noted that Chatham had already exited the mutual fund industry.
5. What will Chatham and Melchiorre focus on now that the case has been settled?
With the case resolved, Chatham and Melchiorre will shift their focus to generating returns for their investors and continuing to manage their existing investments, which include a majority stake in a360 Media and ownership of the McClatchy newspaper chain.