(Article from Registered Funds Regulatory Update, July 2023
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The SEC recently settled charges against Chatham Asset Management, LLC, a registered investment adviser, and its founder, Anthony Melchiorre, for improper trading.
The Order found that in 2014, Chatham acquired 78% of AMI Parent Holdings, LLC’s equity, which gave it effective control of the publisher. From 2016 through 2018, Chatham and Melchiorre traded, on behalf of their private fund clients, in three high-yield debt securities issued by American Media Inc., a wholly-owned subsidiary of AMI Parent Holdings. Chatham and Melchiorre acquired substantial positions in these AMI bonds. On average, the AMI bonds comprised 11 percent of client portfolios and its clients collectively owned 83 percent of the bonds issued by AMI. During this period, Chatham and Melchiorre engaged in rebalancing trades between funds they managed in the AMI bonds through various broker-dealers to meet portfolio constraints. These trades were executed at prices proposed by Chatham and Melchiorre instead of market prices. Chatham and Melchiorre executed more than 100 of such trades from 2016 to 2018, accounting for approximately 81 percent of Chatham’s overall trading. Over time, the prices Chatham and Melchiorre traded the bonds increased at a materially higher rate compared to the prices of similar securities because their trading accounted for the vast majority of the trading in the bonds.
The Order also found that Chatham and Melchiorre calculated the NAVs of their client funds’ holdings using pricing data that was based partly on the trading prices of the securities. As a result, the NAVs of Chatham’s clients were higher than they would have been if Chatham’s trades in the bonds had been removed from the market, resulting in higher fees being charged to Chatham’s clients. Furthermore, Chatham was compensated for its advisory services with a management fee and, for certain clients, an additional performance fee. Chatham’s
clients paid an estimated $11 million in management and/or performance fees that they would not have in the absence of these trades. Chatham in turn paid approximately 55% of such fees to Melchiorre.
The SEC charged Chatham and Melchiorre with violating the anti-fraud provisions of the Advisers Act. Additionally, many of the trades involved mutual funds, for which Chatham acted as subadviser, and in those cases, Chatham and Melchiorre caused the funds to enter into prohibited affiliated transactions under the Investment Company Act.
Without admitting or denying the findings, Chatham and Melchiorre agreed to cease-and-desist orders, censures, disgorgement of $11 million, and prejudgment interest of $3,375,072. Chatham and Melchiorre also agreed to pay civil monetary penalties of $4.4 million and $600,000, respectively. In addition, Melchiorre was permanently barred from the industry.
In the Matter of Chatham Asset Management, LLC, and Anthony Melchiorre, SEC Admin. File No. 3-21355 (Apr. 3, 2023), available at: https://www.sec.gov/litigation/admin/2023/ia-6270.pdf.