SEC ALLEGES FRAUDULENT FEES COLLECTED BY MUTUAL FUND PORTFOLIO MANAGERS

Many people who put money into mutual funds may find that they are charged a large fee for maintaining the fund. The following case is about two portfolio managers who the SEC alleged defrauded a mutual fund that purchases securities issued by the State of Utah and other governmental organizations in Utah. Please read the following details that are a part of the SEC releases on their web site:

“Washington, D.C., Jan. 7, 2011 — The Securities and Exchange Commission today charged two former portfolio managers with defrauding a mutual fund that invests primarily in municipal bonds issued by the State of Utah and its county and local authorities.

The SEC found that Kimball L. Young of Salt Lake City and Thomas S. Albright of Louisville — former co-portfolio managers of the Tax Free Fund for Utah (TFFU) while working at Aquila Investment Management LLC — improperly charged municipal bond issuers more than a half-million dollars in undisclosed "credit monitoring fees" that they pocketed for themselves.

Young and Albright settled the SEC's charges by agreeing to sanctions including bars from the industry and payback of all credit monitoring fees they received along with additional financial penalties.

"Young and Albright violated the most basic duties that investment advisers owe the mutual funds they serve — to act in the best interests of the fund and disclose any conflicts of interest they face," said Bruce Karpati, Co-Chief of the Asset Management Unit in the SEC's Division of Enforcement. "Instead of acting in the fund's best interests, they defrauded the fund by secretly taking fees that neither the fund nor its board knew about."

According to the SEC's orders instituting administrating proceedings, Young and Albright began charging municipal bond issuers "credit monitoring fees" in 2003 on certain private placement and non-rated bond offerings without informing Aquila management or the TFFU's board of trustees. The fees, which ranged between 0.5 and 1 percent of each bond's par value, were a one-time fee purportedly to compensate Young and Albright for performing additional ongoing credit monitoring that they contend was required because the bonds were not rated.

The SEC found that, in fact, any credit monitoring work that Young and Albright performed was already part of their regular job responsibilities. Although deal documents indicated that the fees were required by and would be paid to the TFFU, the fees were instead wired to a company controlled by Young, who shared them equally with Albright. The fees totaled $520,626 from 2003 to April 2009, including $256,071 for the year 2008 alone.

According to the SEC's orders, Aquila management learned in April 2009 that Young and Albright had been charging credit monitoring fees, at which point Aquila promptly suspended Young and Albright and reported their conduct to the SEC.

The SEC's orders found that Young violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 and that Albright violated Section 206(2) of the Advisers Act. The SEC's orders further found that Young and Albright violated Section 17(e)(1) of the Investment Company Act of 1940, which prohibits any affiliated person of a registered investment company, or any affiliated person of such affiliated person, from receiving compensation from any source other than the investment company in connection with the sale of such company's property.

Young and Albright settled the charges without admitting or denying the SEC's findings. Young agreed to pay $294,789 in disgorgement and prejudgment interest and a $75,000 penalty, and to be barred for five years from association with any investment adviser, broker, dealer, or certain other entities and industry organizations. Albright agreed to pay $294,789 in disgorgement and prejudgment interest and a $50,000 penalty, and to be barred for one year from association with any investment adviser, broker, dealer, or certain other entities and industry organizations."