The Securities and Exchange Commission announced that Macquarie Investment Management Business Trust, a registered investment adviser subsidiary of Macquarie Group, will pay a total of $79.8 million to settle overvaluation charges on approximately 4,900 collateralized mortgage obligations held in 20 advisory accounts, including 11 retail mutual funds. and for executing hundreds of cross trades between advisory clients that favored certain clients over others.

Pursuant to the SEC order, from January 2017 to April 2021, MIMBT managed the absolute return mortgage-backed securities strategy, a fixed income investment strategy invested primarily in mortgage-backed securities, CMO and treasury futures.

Macquarie Asset Management released a statement on the settlement, calling the matter a “legacy matter” and “not consistent with the way we do business.”

“Our business is built on the principles of integrity and accountability,” the statement said. “We have already undertaken and are focused on completing additional corrective steps to address the issues identified in the investigation, with customers as a priority. We also continue to invest in our risk culture to ensure we meet our fiduciary duties to the highest standards.”

Some of the positions the SEC investigated included thousands of smaller stocks, CMO's so-called “odd lots” that traded at a discount to larger institutional positions. However, according to the SEC, MIMBT valued odd-lot CMOs “using prices obtained from a third-party pricing service that were intended only for institutional lots.”

The SEC order found that MIMBT “had no reasonable basis to believe that it could sell odd CMOs at dealer estimates, and thousands of odd CMO positions were marked down at inflated prices. This resulted in MIMBT overestimating the performance of client accounts holding overvalued CMOs.

Further, the SEC's order found that MIMBT attempted to stem its losses to investors by “arranging cross trades with linked accounts, rather than selling overvalued CMOs to the market.” In one case, MIMBT allegedly executed 465 insider trades between a selling account and 11 retail mutual funds at actual independent market prices.

The result of these trades was that the retail mutual funds absorbed losses that would otherwise have occurred if MIMBT had sold the positions in the open market, according to the SEC. The Trust also “arranged approximately 175 cross-dealer trades in which MIMBT temporarily sold odd CMO positions to third-party brokers and then repurchased the same positions for distribution to one or more related client accounts, providing liquidity to investors who were redeeming in an otherwise illiquid market, often at above-market prices.”

“It is alarming that a fiduciary profited from retail mutual funds that advised and executed illegal trades to mitigate the overvaluation of the funds' assets,” Eric I. Bustillo, director of the SEC's Miami regional office, said in a statement. “The use of a third-party valuation service does not negate an investment adviser's obligation to accurately value assets.”

The SEC order finds that MIMBT violated the antifraud and compliance provisions of the Investment Advisers Act of 1940, as well as certain provisions of the Investment Company Act of 1940.

Without admitting or denying the SEC's findings, MIMBT agreed to a censure, to cease and desist from further violations of the charged provisions, and to pay a $70 million fine and disgorgement and prejudgment interest, totaling 9.8 additional million dollars. MIMBT also agreed to retain a compliance consultant to conduct a comprehensive review of its policies and procedures regarding the assessment of CMOs and the risks associated with liquidity and cross trading, among others.