December 2, 2013 — To combat fraud in the securities industry, the Securities and Exchange Commission (SEC) relies on tips received through the agency’s whistleblower office. Created by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) of 2010, the whistleblower program gives tipsters from within the securities industry, and others with unique information, the means to collaborate with the SEC to protect investors and stop fraudulent schemes.
Investment Advisory Firm And Its Owner Charged With Fraud
An investment advisory firm in Morristown, New Jersey and its owner have been charged with misleading investors in a collateralized debt obligation (CDO). According to the SEC, Harding Advisory LLC and its owner, Wing F. Chau, breached their fiduciary duties to investors and compromised their independent judgment while acting as collateral manager to Octans I CDO Ltd.
The misconduct allegedly occurred in connection with efforts to accommodate Magnetar Capital LLC, a third-party hedge fund that had invested in the equity of the CDO. Chau was aware that Magnetar had a strategy of “hedging” its investments in CDOs by betting against the debt issued by the CDOs. Chau therefore understood that Magnetar stood to gain if Octans I failed to perform. Magnetar’s interests, then, were not fully aligned with those of other investors in Octans I’s debt tranches who would profit only if the CDO performed well.
Chau and Harding, while putting together the collateral for Octans I, allegedly gave Magnetar influence over the selection process without disclosing the move to other investors. Harding allegedly gave Magnetar certain rights in assembling a portfolio of subprime mortgage-backed assets that functioned as collateral for debt instruments issued to Octans I investors. Magnetar, for example, was permitted to veto Harding’s proposed selections, leading to the result that Harding chose assets that were disfavored by its own credit analysts.
In materials used to solicit investors for Octans I, Chau and Harding omitted reference to Magnetar’s influence over the process and they misrepresented the standard of care that Harding would follow in selecting collateral for Octans I.
SEC Learns About Illegal Securities Scams from Tipsters
Securities industry insiders who discover a breach of fiduciary duty like the one alleged in this case should learn how the Dodd-Frank whistleblower program works. The whistleblower lawyers with Waters & Kraus have a proven track record for safeguarding informants’ interests in a wide variety of cases involving fraud against the government. Contact us by email or phone our qui tam lawyers at 855.784.0268 to discuss how we can work together to stop securities fraud.