The US Securities and Exchange Commission (SEC) has charged two investment advisory firms and two portfolio managers, for failing to adequately inform investors about the fund’s risky derivative strategies, which caused it to collapse during the financial crisis.
The firms include Claymore Advisors and Fiduciary Asset Management LLC (FAMCO), while the co-portfolio managers are former FAMCO employees Mohammed Riad of Clayton, and Kevin Timothy Swanson.
The market supervisor alleges that Fiduciary/Claymore Dynamic Equity Fund (HCE) tried two plans to boost returns — writing out-of-the money put options and shorting variance swaps.
Due to this, the Midwest-based closed-end mutual fund suffered from undisclosed risks, subsequently losing over $45m equivalent to nearly 45% of its net assets, in September and October 2008.
According to the SEC orders, Claymore failed to supervise FAMCO as required by the firms’ investment advisory agreements, and did not provide adequate disclosure in HCE’s annual report about the fund’s use of written put options, variance swaps and their associated risks.
As per terms of the settlement, Claymore will set up a plan to distribute up to $45m to compensate investors for losses related to the trading.
In relation with the same matter, FAMCO consented to pay an additional $2m in disgorgement and penalties, while case against its former employees Mohammed Riad and Kevin Swanson will continue.