UK-based investment adviser BlueCrest Capital Management Ltd is to pay $170m (£126m) to settle charges of inadequate disclosures, material misstatements, and misleading omissions brought by the Securities and Exchange Commission (SEC)
The US regulator said the charges related to the hedge fund’s transfer of top traders from its flagship client fund, BlueCrest Capital International (BCI), to a proprietary fund, BSMA Ltd, and their replacement with an underperforming algorithm.
The SEC alleged that BlueCrest created BSMA to trade the personal capital of BlueCrest personnel using primary trading strategies that overlapped with BCI’s.
Members of BlueCrest’s governing body, which made the relevant decisions regarding BSMA, had a 93% ownership interest in BSMA that peaked at $1.79bn, compared to its ownership interest of approximately $619m in BCI.
The SEC said that over a period of more than four years, BlueCrest made inadequate and misleading disclosures concerning BSMA’s existence, the movement of traders from BCI to BSMA, the use of the algorithm in BCI, and associated conflicts of interest.
According to the regulator, BlueCrest transferred a majority of its highest-performing traders from BCI to BSMA, and assigned many of its most promising newly hired traders, eligible to trade for either fund, to BSMA.
In addition, BlueCrest failed to disclose that it reallocated the transferred traders’ capital allocations in BCI to a semi-systematic trading system, which was essentially a replication algorithm that tracked certain trading activity of a subset of BlueCrest’s live traders.
BlueCrest did not disclose certain material facts about the algorithm to BCI’s independent directors. According to the SEC, the algorithm generated significantly less profit with greater volatility than the live traders, while BlueCrest was able to keep more of any performance fees generated by the algorithm than by live traders.
Adam Aderton, co-chief of the SEC’s asset management unit, said: ‘An adviser’s disclosures to investors and prospective investors in funds they manage must be accurate.
‘BlueCrest investors were marketed a fund with exceptional trading talent but instead got a fund with an undisclosed algorithm that performed worse than those touted traders.’
The SEC stated that BlueCrest violated antifraud provisions of the Securities Act of 1933 and Investment Advisers Act of 1940 as well as the Advisers Act’s compliance rule.
Without admitting or denying the SEC’s findings, BlueCrest agreed to a cease-and-desist order imposing a censure, and must pay disgorgement and prejudgment interest of $132,714,506 and a penalty of $37,285,494, all of which will be returned to investors.
