Hedge Fund Managers Must Guard Against Illicit Cross Trading to Avoid Significant Penalties

The SEC recently settled parallel enforcement actions against an investment adviser, a broker-dealer and two of their respective employees who allegedly orchestrated an illicit securities “parking” scheme. The SEC charged that the employees arranged for certain clients of the investment adviser to sell securities to the broker-dealer, only for the investment adviser to repurchase those securities for other clients or funds on the next trading day at prearranged prices. This allegedly circumvented the investment adviser’s policies on cross trading and parking securities and benefited some clients at the expense of others, while earning the broker-dealer a predetermined markup on each of the trades. This article details the alleged trading scheme; the relevant laws and regulations; the alleged violations; and the results of the settlements. For an overview of issues arising out of cross trades and other transactions among funds and their advisers, see “Katten Forum Identifies Best Practices for Hedge Fund Managers Regarding Best Execution, Soft Dollars, Principal Trades, Agency Cross Trades, Cross Trades and Trade Errors” (Mar. 13, 2014). 

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