SEC Fines Advisory Firms $17.5 Million Over Debt Strategy Misrepresentations

Two UBS advisory firms agreed to settle charges that they misrepresented a closed-end fund’s investment strategy to investors and the SEC for a penalty of $17.5 million. The enforcement action is yet another resulting from wrongdoing that started during the financial crisis.

Prior to 2008, the fund at issue invested in distressed debt, predicting that its value would rise. In 2008, the investment manager began purchasing credit default swaps which bet that debt would decrease in value. The complete reversal of investment strategy from long debt to short debt without disclosing the change to investors and making misleading statements to both investors and the SEC was at the heart of this action.

After becoming net short debt, the investment manager continued to send out marketing materials representing that the firm was long debt. The investment adviser failed to supervise the management team by ordering it to pursue a long debt strategy or informing the board and investors about the change in the fund’s strategy.

Ultimately, the investment losses overwhelmed the fund and it was forced to liquidate. Approximately $13 million of the settlement will be distributed to investors harmed by the misrepresentations.

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