The U.S. Securities and Exchange Commission has initiated proceedings against Sam Masucci, along with his company, ETF Managers Group, and its parent company, Exchange Traded Managers Group LLC, claiming they disadvantaged an ETF they were advising and lied to its trustees in hopes of obtaining financing to pay for legal fines they incurred in a separate matter. 

The matter has led to $4.4 million fines and penalties for Masucci and his firm.

Masucci and ETF Managers Group were the advisors for the ETFMG Alternative Harvest ETF, an exchange-traded fund that followed a cannabis index, according to the SEC. In their capacity as advisors, it was Masucci and ETF Managers Group’s responsibility to make financial decisions on behalf of the ETF, according to the SEC. 

One of those decisions involved determining which brokerage firm to use for ETFMG Alternative Harvest ETF’s custodian and lucrative securities lending business, the agency said. Since the ETF followed a cannabis index, many firms did not wish to associate with it, so the options for a brokerage firm in 2017 were limited.

They agreed on a California-based brokerage, which offered to conduct the work, but required 40% of the securities lending business, which is unusually high for such an arrangement, according to the complaint. 

In 2019, Masucci, along with his firms, were fined $78 million for a separate case involving a breach of contract. However, they only had $2 million, meaning the fine threatened to put them out of business. 

In the meantime, Masucci and his firms began speaking with other brokerage firms about taking on the custodian and securities lending services for the ETF but at much better rates. However, only the firm’s current broker was willing to provide $20 million in financing to help pay off the fine that Masucci had incurred, the regulator said.

Even though other firms were willing to offer better rates, the SEC claims that Masucci elected to shut down those discussions in favor of keeping the relationship with the current brokerage firm, which was willing to provide him with financial assistance.

“In exchange for $20 million in financing and other services, Masucci agreed to keep the ETF’s lucrative securities-lending business at the broker-dealer that provided the massive influx of financing despite offers with better terms from other securities lenders that could have benefited investors,” the SEC said.

To preserve the relationship, the SEC said Masucci lied to the ETF’s trustees, telling them that they had to remain with the original brokerage firm because they did not have any other viable options. He also failed to disclose his arrangement with the brokerage firm or that there was a conflict of interest. 

“Investment advisors cannot mislead clients or leverage client assets for their own benefit,” said Corey Schuster, co-chief of the SEC Enforcement Division’s Asset Management Unit. “Our action today demonstrates the SEC’s continued commitment to holding firms and individuals accountable.”

Last month, as mandated by the SEC, Masucci resigned from his position as CEO of the firm as well as his role as trustee of the advisor. The SEC also prohibited him from contacting any employees at the firm or attempting to exert any influence over his voting shares.

In addition, without admitting or denying the SEC’s findings, Masucci agreed to a cease-and-desist order and agreed to pay a $400,000 penalty. He also agreed to an associational bar under the Advisers Act and a prohibition under the Investment Company Act with a right to reapply after three years. ETFMG, along with the firm’s parent company, agreed to pay a $4 million civil fine, which they will pay jointly and severally along with censures and a cease-and-desist order.