The SEC has charged two senior fund executives with securities fraud in connection with making misleading statements about a short-term bond fund marketed as an enhanced cash product.  The respondents’ firm agreed to pay $118 Million to the SEC and FINRA to settle related charges.  The SEC alleges that the executives - the fund’s portfolio manager and his boss - substantially assisted and marketed the fund as a cash product even though the fund invested more than 25% of its assets in mortgage-backed securities.  The SEC also alleges that the execs made misleading statements to investors to dissuade them from redeeming as the fund’s NAV declined.  The SEC charges direct violations of Rule 10b-5 as well as aiding and abetting the firm’s violations of the anti-fraud rules.

OUR TAKE: The law with respect to individual liability of fund executives for misstatements made with respect to their firm’s funds remains murky, because it is unclear how the fund executives personally benefited from the alleged unlawful conduct.  The SEC may have more success with the aiding/abetting claims than the direct liability charge.  

http://sec.gov/litigation/admin/2011/33-9171.pdf

http://sec.gov/litigation/complaints/2011/comp21805.pdf

http://www.finra.org/Newsroom/NewsReleases/2011/P122755