SEC CHARGES BLACKROCK ADVISORS LLC WITH BREACHING FIDUCIARY DUTY

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

04/20/2015 01:15 PM EDT

The Securities and Exchange Commission today charged BlackRock Advisors LLC with breaching its fiduciary duty by failing to disclose a conflict of interest created by the outside business activity of a top-performing portfolio manager.

BlackRock agreed to settle the charges and pay a $12 million penalty.  The firm also must engage an independent compliance consultant to conduct an internal review.

According to the SEC’s order instituting a settled administrative proceeding, Daniel J. Rice III was managing energy-focused funds and separately managed accounts at BlackRock when he founded Rice Energy, a family-owned and operated oil-and-natural gas company.  Rice was the general partner of Rice Energy and personally invested approximately $50 million in the company.  Rice Energy later formed a joint venture with a publicly-traded coal company that eventually became the largest holding (almost 10 percent) in the $1.7 billion BlackRock Energy & Resources Portfolio, the largest Rice-managed fund.  The SEC’s order finds that BlackRock knew and approved of Rice’s investment and involvement with Rice Energy as well as the joint venture, but failed to disclose this conflict of interest to either the boards of the BlackRock registered funds or its advisory clients.

“BlackRock violated its fiduciary obligation to eliminate the conflict of interest created by Rice’s outside business activity or otherwise disclose it to BlackRock’s fund boards and advisory clients,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “By failing to make such a disclosure, BlackRock deprived its clients of their right to exercise their independent judgment to determine whether the conflict might impact portfolio management decisions.”

The SEC’s order also finds that BlackRock and its then-chief compliance officer Bartholomew A. Battista caused the funds’ failure to report a “material compliance matter” – namely Rice’s violations of BlackRock’s private investment policy – to their boards of directors.  BlackRock additionally failed to adopt and implement policies and procedures for outside activities of employees, and Battista caused this failure.  Battista agreed to pay a $60,000 penalty to settle the charges against him.

“This is the first SEC case to charge violations of Rule 38a-1 for failing to report a material compliance matter such as violations of the adviser’s policies and procedures to a fund board,” said Julie M. Riewe, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.  “BlackRock and Battista caused the funds’ failure to report Rice’s violations of BlackRock’s private investment policy and denied the funds’ boards critical compliance information alerting them to Rice’s outside business interests.”

BlackRock agreed to be censured and consented to the entry of the SEC’s order finding that the firm willfully violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7.  The order finds that the firm caused violations of Rule 38a-1 of the Investment Company Act of 1940.  Battista also consented to the entry of the order finding that he caused violations of Section 206(4) of the Advisers Act, Rule 206(4)-7, and Rule 38a-1.  BlackRock and Battista are required to cease and desist from committing or causing any further violations.  BlackRock and Battista neither admitted nor denied the findings.

The SEC’s investigation was conducted by Janene M. Smith, David A. Becker, and Brian E. Fitzpatrick and supervised by Jeffrey B. Finnell of the SEC Enforcement Division’s Asset Management Unit.

HEDGE FUND ADVISER CHARGED WITH BREACHING FIDUCIARY DUTY FOR ROLE IN CONFLICTED PERSONAL TRANSACTION

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Charges N.Y.-Based Hedge Fund Adviser With Breaching Fiduciary Duty By Participating in Conflicted Principal Transaction


2013-183 Washington D.C., Sept. 18, 2013 — The Securities and Exchange Commission charged the adviser to a New York-based hedge fund with breaching his fiduciary duty by engineering an undisclosed principal transaction in which he had a financial conflict of interest.

In a principal transaction, an adviser acting for its own account buys a security from a client account or sells a security to a client account.  Principal transactions can pose potential conflicts between the interests of the adviser and the client, and therefore advisers are required to disclose in writing any financial interest or conflicted role when advising a client on the other side of the trade.  They also must obtain the client’s consent.

The SEC alleges that Shadron L. Stastney, a partner at investment advisory firm Vicis Capital LLC, traded as a principal when he authorized the client hedge fund to pay approximately $7.5 million to purchase a basket of illiquid securities from a personal friend and outside business partner hired by the firm as a managing director.  Stastney required his friend to divest these personal securities holdings as he came on board at the firm because they overlapped with securities in which the hedge fund also was invested.  Stastney failed to tell the client hedge fund or any other partners and management at the firm that he had a financial stake in some of the same securities sold into the fund.  Stastney personally benefited and received a portion of the proceeds from the sale, and therefore was trading as a principal in the transaction.

Stastney agreed to pay more than $2.9 million to settle the SEC’s charges.

“Fund advisers cannot sit on both sides of a transaction as buyer and seller without the consent of the clients who rely on them for unbiased investment advice,” said Julie M. Riewe, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.  “Stastney failed to live up to his fiduciary duty when he unilaterally set the terms of the transaction and authorized it without disclosing that he would personally profit from it.”

According to the SEC’s order instituting a settled administrative proceeding, in late December 2007 and early January 2008, Stastney arranged for his friend to sell the conflicted securities to the client hedge fund – Vicis Capital Master Fund – for $7.475 million.  Stastney’s friend informed him at the time that Stastney had a financial interest in some of the conflict securities, and Stastney would receive a portion of the sales proceeds.

The SEC’s order alleges that Stastney informed his two partners at the firm about the contemplated transaction, but never disclosed his personal financial interest in the transaction to them.  Stastney also did not disclose the conflict to the individual serving as the firm’s chief financial officer and chief compliance officer.  Moreover, Stastney failed to disclose to the trustee of the hedge fund that he had a personal financial interest in the transaction, and failed to obtain the client’s consent as required in a principal transaction.

According to the SEC’s order, after the hedge fund purchased the conflicted securities, Stastney’s friend wired Stastney’s share of more than $2 million of the sales proceeds to his personal savings bank account.

The SEC’s order requires Stastney, who lives in Marlboro, N.J., to pay disgorgement of $2,033,710.46, prejudgment interest of $501,385.06, and a penalty of $375,000.  Stastney also is barred from association with any investment company, investment adviser, broker, dealer, municipal securities dealer, or transfer agent for at least 18 months.  Stastney will be permitted to finish winding down the fund under the oversight of an independent monitor payable at his own expense.  Stastney has consented to the issuance of the order without admitting or denying any of the findings and has agreed to cease and desist from committing or causing any violations and any future violations of Sections 206(2) and 206(3) of the Investment Advisers Act of 1940.

The SEC’s investigation was conducted by Vincenzo A. DeLeo and Brian E. Fitzpatrick of the Asset Management Unit with the assistance of James Flynn, Alistaire Bambach, and Nancy A. Brown in the New York Regional Office.  The case was supervised by Sharon B. Binger.  The investigation began following an examination of the firm by Jennifer M. Klein, Arthur Schmidt, and Belinda L. Rodriquez under the supervision of Dawn M. Blakenship.