Now that you’ve seen what ACA Insight has to offer, don’t be without it. Subscribe now!

The weekly news source for investment management legal and compliance professionals

Current subscribers - please log in to the website in the upper right-hand corner

News September 5, 2011 Issue

Pegasus Case Makes a Point

It was a small adviser and a small amount of money was at stake, but the SEC took the time to make a big point about the doís and doníts of certain trading practices.

As in, do have comprehensive compliance policies, and donít take money that rightfully belongs to your clients.

Back in the summer, the SEC entered an order against Pegasus Investment Management (Pegasus), its president/CCO, and a vice president of the firm who was also a 30 percent owner.

Pegasus is a small advisory firm operating from Bainbridge Island, Washington, that is the general partner in two private funds. Douglas Saksa owned 70 percent of Pegasus, and was the firmís CCO. Peter Bortel owned the other 30 percent and participated in managing the firmís $26 million in assets.

In the spring of 2008, Pegasus began permitting the bundling of its futures trading with the futures trading of an unnamed proprietary trading firm (Firm). The Firm sought reduced trading commissions, and in return, kicked back $0.50 per trade to Pegasus. Between 2008 and 2009, said the order, the Firm paid $90,000 to Pegasus under this arrangement.

Then the SEC dropped in to examine Pegasus.

The exam staff found monthly reconciliation statements of the payments, and when it asked questions, the payments stopped.

The SEC did not name the Firm or the introducing broker involved. Instead, it shined a spotlight on the fiduciary and compliance program failures alleged to have been committed by Pegasus, Saksa, and Bortels.

"[T]here were no policies requiring that fund assets be used for the benefit of the Funds or requiring that cash compensation received by Pegasus in connection with the fundsí activities be disclosed to investors or remitted to the Funds," said the SECís order. Further, Pegasus operated "informally," and Saksa had failed to supervise Bortels in the receipt of the undisclosed cash payments for upwards of a year.

Saksa, Bortels, and through them, Pegasus, had failed to use reasonable care to avoid misleading clients, and fully and fairly disclose conflicts of interest. The payments had interfered with the adviserís "loyal and disinterested" advice. "The fundamental obligation of the adviser to act in the best interest of his client also generally precludes the adviser from using client assets for the adviserís own benefit or the benefit of other clients, at least without client consent," said the order.

For these policy and fiduciary failures, Pegasus agreed to disgorge the $90,000 along with approximately $5,470 in prejudgment interest. Saksa and Bortels were censured, and a cease and desist order was entered against Bortels and Pegasus. Bortels paid a $50,000 find and Saksa paid a $25,000 fine.