The U.S. Securities and Exchange Commission (SEC) recently secured final judgments by consent against Defendants Antony Caine, Anish Parvataneni, LJM Funds Management, Ltd. (“LJMFM”) and LJM Partners, Ltd. (collectively with LJMFM, “LJM”), whom the SEC previously charged with allegedly defrauding investors by making false and misleading statements about the risks of LJM’s “net short” options trading strategy, as well as LJM’s risk management practices. The SEC separately settled related charges with LJM’s Chief Risk Officer, Arjuna Ariathurai.
The SEC complaint, filed in the U.S. District Court for the Northern District of Illinois Eastern Division, charged defendants with violating Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5], 17(a) of the Securities Act [15 U.S.C. § 77q(a)], Sections 206(1), 206(2), 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder [15 U.S.C. §§ 80b-6(1), 80b-6(2), 80b-6(4), and 17 C.F.R. § 275.206(4)-7, 8], Section 15(c) of the Investment Company Act [15 U.S.C. §§ 80a-15(c)], and/or Section 34(b) of the Investment Company Act [15 U.S.C. § 80a-33].
The SEC’s federal court complaint alleged that defendants breached their fiduciary duties and made material misrepresentations relating to the worst-case loss estimates for the LJM managed funds and the funds’ risks. Those estimates were neither based on, nor consistent with, any stress testing performed by LJM Management and LJM Partners based on historical market scenarios. Other than to comply with margin requirements imposed by their futures commission merchant, which provided them the required liquidity to execute their strategy, LJM Management and LJM Partners did not have any established risk parameters, as per the SEC’s allegations.
During a period, which Defendants characterized as a low volatility environment or a “low volatility regime” in communications to investors and/or their advisers, Defendants attempted to obtain additional option premiums by: (a) writing more put options, (b) increasing the ratio of short-to-long put options, and (c) writing put options closer to the money. While these efforts generated additional premium income for the funds, they also increased the risk that the portfolios would suffer much larger losses in the event of a market dislocation. During a large spike in market volatility, the P&G Fund and the Private Funds suffered trading losses of more than $1 billion, or approximately 80% of their value. These losses resulted in the funds’ total collapse and liquidation.
The final judgments, to which all defendants consented with neither admitting nor denying the SEC’s allegations, permanently enjoined each of the defendants from the violations charged. LJMFM and Caine were also ordered to pay, jointly and severally, disgorgement of $1,720,317 with prejudgment interest of $699,129; LJM Partners and Caine to pay, jointly and severally, disgorgement of $1,567,713 with prejudgment interest of $637,112; and Parvataneni to pay disgorgement of $512,724 with prejudgment interest of $208,368. The final judgment further ordered Caine to pay a $500,000 civil penalty and Parvataneni to pay a $200,000 civil penalty, and enjoined Caine for three years, and Parvataneni for one year, from managing or advising on securities investments for, or acting as or being associated with an investment adviser to, any third-party, except for their wives and children.
In related proceedings, the SEC also instituted settled administrative and cease-and-desist proceedings against Ariathurai, who agreed, without admitting or denying the SEC’s findings, to an associational bar with a right to apply for reentry after three years, disgorgement and prejudgment interest of $97,444, and a civil penalty of $150,000. In parallel civil actions, the Commodity Futures Trading Commission announced charges against LJM, Caine, Parvataneni, and Ariathurai.
SEC Final Judgment Attorney David R. Chase
Nationally known and respected SEC defense attorney David Chase, Esq. of the Law Firm of David R. Chase, formerly a SEC Enforcement Attorney, represents those under SEC investigation nationwide for various alleged securities law offenses, including insider trading, market manipulation, investment advisor violations, and hedge fund fraud. If you have just received an SEC Subpoena and need strategic advice from an experienced, seasoned lawyer, contact David toll free at: 800-760-0912 or e-mail him at: david@davidchaselaw.com for a confidential consultation. Visit the Firm’s website for more information on SEC investigations and the Firm’s prior successful results for its clients at: www.securitiesfrauddefense.net.
