Adviser Sued For Making Hedge Fund Clients Eat Trade Error
Reminder: advisers shouldnít make clients pay for their own trading errors.
In a noteworthy enforcement proceeding, the SEC alleged that in November 2002, traders at San Francisco-based EGM Capital sold the same position twice, creating an inadvertent short position. The error, which resulted in a loss of $404,000, was discovered only a few days after the duplicative trade. According to the SEC, the firmís then-CEO instructed that the erroneous trade be re-papered to appear deliberate.
The firm allegedly did not have any error correction procedures. The SECís complaint did not indicate whether the fundsí offering documents disclosed whether or not the funds would indemnify the manager for trading errors.
To settle the SECís Adviser Act fraud charges against himself and the firm, the 68-year old former CEO, Michael Jackson, agreed to pay a $75,000 civil penalty and to be barred from the advisory industry for 9 months. Jackson, who already had retired back in 2001, "is pleased that this matter is resolved," according to his lawyer, Howard Rice attorney Kenneth Hausman. He noted that the error "represented less than 1/3 of 1 percent of the hedge funds clientsí profits of over $100 million in 2000."
EGM Capital was sold in 2003.