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SEC charges advisory firm with breach of fiduciary duty and fraud



by Joseph Earnest October 18, 2013


Newscast Media WASHINGTON—The Securities and Exchange Commission today announced charges against a Morristown, N.J.-based investment advisory firm and its owner for misleading investors in a collateralized debt obligation (CDO) and breaching their fiduciary duties.

The SEC's Enforcement Division alleges that Harding Advisory LLC and Wing F. Chau compromised their independent judgment as collateral manager to a CDO named Octans I CDO Ltd. in order to accommodate trades requested by a third-party hedge fund firm whose interests were not necessarily aligned with the debt investors.  Harding agreed to give the hedge fund firm rights in the process of selecting and acquiring a portfolio of subprime mortgage-backed assets to serve as collateral for debt instruments issued to investors in the CDO.

     *Click here to read or download SEC's cease-and-desist order. (pop-up)

These rights, which were not disclosed to investors, included the right to veto Harding's proposed selections during the "warehouse" phase that preceded issuance of the CDO's debt instruments.  The influence of the hedge fund firm led Harding to select assets that its own credit analysts disfavored.

"A collateral manager's independent selection of assets is an important selling point to potential CDO investors," said George S. Canellos, co-director of the SEC's Division of Enforcement. “Investors had a right to know that Harding and Chau had chosen to accommodate the interests of others and abandon their own obligations to act in the best interests of the CDO they advised."

The SEC's Division of Enforcement alleges that by engaging in the conduct described in the SEC's order, Harding and Chau violated Section 17(a) of the Securities Act of 1933 and Section 206 of the Investment Advisers Act of 1940.  Chau also is charged with aiding and abetting and causing Harding's violations. The proceedings before an administrative law judge will determine what relief against Harding and Chau is in the public interest.

The SEC's investigation, which is continuing, has been conducted by staff in the Complex Financial Instruments Unit and the New York Regional Office, including Steven Rawlings, Brenda Chang, Elisabeth Goot, Sharon Bryant, Kapil Agrawal, Howard Fischer, Daniel Walfish, and Douglas Smith.  The case was supervised by Reid Muoio, and the litigation will be led by Mr. Fischer, Mr. Walfish, Ms. Goot, and Ms. Chang.

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