The trades at issue began more than a half-decade ago. After building up a concentrated investment in American Media — now known as a360 Media — Chatham decided to spread the bet among its various funds. According to the SEC, the firm carried out more than 100 of the so-called rebalancing trades.
Chatham sought advice from the compliance consultant, which according to the hedge fund said the firm could sell the bonds and repurchase them.
“The foundational principle underlying the advice was to ensure that the transactions occurred at independently derived market prices,” the SEC wrote in a settlement document.
Chatham’s regulatory troubles began when the SEC conducted an on-site examination in 2018 and sought details about whether the firm had conducted cross trades among funds it managed, an industry practice that had piqued the agency’s interest.
In early 2019, Bloomberg published a report on Chatham’s bond trading, mentioning that the firm had faced questions during an SEC exam. In its lawsuit against ACA, the hedge fund said that some investors redeemed existing investments or refrained from making new ones after the SEC’s scrutiny was “leaked to the public.”
A key problem, according to the SEC, was that the American Media trades were executed at prices proposed by Melchiorre and not at levels independently derived from the broader market. Some transactions ended up raising prices on the bonds, the regulator said, estimating that Chatham’s clients ended up paying $11 million in additional fees to the firm because of the rebalancing trades.
As part of their settlement with the agency, Chatham and Melchiorre forfeited those payments, plus interest. The regulator didn’t name or fault ACA in the case.
“Chatham fails to make clear that the SEC suggested no wrongdoing by ACA or that ACA knew and advised Chatham of the pre-arranged trading pattern,” the consultant told the court in its bid to have the case tossed out. “Chatham has not and cannot plead that ACA ever knew specific facts found by the SEC.”
This article was provided by Bloomberg News.