The Securities and Exchange Commission today announced that UK-based investment adviser BlueCrest Capital Management Limited has agreed to pay $170 million to settle charges arising from inadequate disclosures, material misstatements, and misleading omissions concerning its transfer of top traders from its flagship client fund, BlueCrest Capital International (BCI), to a proprietary fund, BSMA Limited, and replacement of those traders with an underperforming algorithm.
The SEC will distribute the $170 million to harmed investors.
According to the SEC’s order, BlueCrest created BSMA to trade the personal capital of BlueCrest personnel using primary trading strategies that overlapped with BCI’s. As set forth in the order, members of BlueCrest’s governing body, which made the relevant decisions regarding BSMA, had a 93 percent ownership interest in BSMA that peaked at $1.79 billion compared to its ownership interest of approximately $619 million in BCI.
The order finds that, over 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 order, 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.
The order also finds that 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.
The order finds that BlueCrest did not disclose certain material facts about the algorithm to BCI’s independent directors. According to the order, the algorithm generated significantly less profit with greater volatility than the live traders. The order finds that BlueCrest was able to keep more of any performance fees generated by the algorithm than by live traders.
“BlueCrest repeatedly failed to act in the best interests of its investors, including by not disclosing that it was transferring its highest-performing traders to a fund that benefitted its own personnel to the detriment of its fund investors,” said Stephanie Avakian, director of the SEC’s Division of Enforcement. “This settlement holds BlueCrest responsible for its conduct and furthers the SEC’s goal of returning funds to harmed investors.”
“An adviser’s disclosures to investors and prospective investors in funds they manage must be accurate,” said Adam Aderton, Co-Chief of the SEC’s Asset Management Unit. “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’s order finds that BlueCrest willfully 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.
The SEC’s investigation was conducted by Asset Management Unit members Marilyn Ampolsk, Marie DeBonis, Brian Fitzpatrick, and Luke Pazicky, and supervised by Ranah Esmaili.
The Enforcement Division appreciates the assistance of staff from the Office of Compliance Inspections and Examinations, including the Quantitative Analytics Unit, and the Division of Economic and Risk Analysis. The Enforcement Division also wishes to thank the UK’s Financial Conduct Authority for its assistance.