US regulators probe Macquarie
The Australian 12:00am March 9, 2019
Ben Butler
EXCLUSIVE The US Securities and Exchange Commission has been investigating a key American subsidiary of Macquarie Group over allegations it committed fraud by misleading investors in a $US12 billion ($17.1bn) fund.
An internal SEC order opening a private investigation into the Macquarie subsidiary, Delaware Investment Advisers, reveals the regulator suspected that from “at least late 2014” the company and its officers may have been violating US law by “employing devices, schemes or artifices to defraud any client or potential client” looking to tip money into the successful Delaware Value Fund, which holds a clutch of large US-listed stocks.
The January 31, 2017 SEC order, obtained by The Weekend Australian under US freedom-of-information laws, also says Delaware may have committed additional violations by “making untrue statements of material fact or omitting to state material facts concerning investment processes and asset allocations” to investors and giving investors half-yearly reports “containing information and financial statements or their equivalents that are materially misleading."
Documents show that trading in 14 blue-chip US stocks, including tech giants Oracle and Xerox and oil groups Chevron and Exxon Mobil, is at the centre of the SEC investigation.
Delaware was also accused of misleading the SEC in reports filed with the regulator and using nondisclosure agreements with former staff that “have had the purpose or effect of impeding participation by those employees in the SEC’s whistleblower program”.
Macquarie bought Delaware, which manages more than $250bn in total, from US company Lincoln Financial Group in 2009 for $516 million, a relatively low figure that was only possible due to the aftershocks of the global financial crisis.
Delaware went on to become an important beachhead used by Macquarie to establish the US operation that now stokes the Australian group’s funds management engine.
A Macquarie spokeswoman said the group “fully responded to requests for documents and to some follow-up questions by the SEC in relation to this matter during 2017”.
“There has been no further communication with the SEC on this matter or developments over the past 17 months,” she said. The SEC’s claims mirror those made by former Delaware fund manager Anthony Lombardi in a US Federal Court lawsuit lodged against Macquarie and Delaware boss D. Tyson Nutt.
In his lawsuit, lodged in November 2017, Mr Lombardi accused Macquarie and Mr Nutt of “failing to adequately research certain equities before purchasing them”, buying and holding shares that “did not fit the stated quantitative metrics promised to shareholders” and “remaining conscientiously overweighted in certain sectors despite knowledge of unacceptable risk associated with same”.
Mr Lombardi said from late 2014 he refused to sign off on inaccurate statements and told Mr Nutt he believed the company was violating securities laws by misleading investors and the SEC. He complained that instead of fixing the problem, Mr Nutt retaliated by freezing him out of the business and said Macquarie sacked him in February 2016.
The allegations were never tested in court because the case was settled in October last year. Macquarie and Mr Lombardi’s lawyer, Katherine Oeltjen of Philadelphia-based firm Console Law, declined to comment.
Mr Nutt and Mr Lombardi were part of a team that joined Delaware from Merrill Lynch in March 2004.
Mr Lombardi told the US Federal Court that during his time at Delaware the Value Fund “grew amid strong performance of the fund as its success attracted additional investments, to have more than 10 billion dollars in assets under management”.
He said the team, which varied between four and six people, also managed “sleeves” of additional money for other funds run by Delaware.
During his time, the assets managed by the team grew to more than $US20bn, he said.
He said that as the only member of the team with formal research publication experience, Macquarie and Mr Nutt “relied upon him to develop the team’s research rubric”.
“Defendant Nutt and others presented same to investors and potential investors, promising that the process would be followed prior to the fund’s purchase of any instrument as well as in connection with the sale of any instrument,” he said in his complaint.
He said he discovered that “inaccurate or incomplete information” was contained in detailed commentaries on the fund’s performance were also provided to investors and the SEC.
This led to him refusing to certify the filings “as they did not accurately describe fund performance or appropriately summarise fund holdings”, he said.
He said he provided information about the violations of securities laws to Mr Nutt, who “had authority to investigate, discover or terminate the misconduct” — but did not do so.
“Instead, defendant Nutt retaliated against plaintiff for reporting misconduct,” Mr Lombardi claimed.
The retaliation included cancelling weekly team meetings “in an effort to avoid any further complaints by plaintiff regarding misconduct and isolate him further from decision-making”, he said.
He accused Delaware of accepting fresh money into the fund in February 2015 that was “invested contingent on certain conditions that were inconsistent with the fund’s SEC filings and other published materials”.
Mr Lombardi said that on February 17, 2015, he complained to Delaware’s head of equity investments, Mike Hogan, about the company’s “deviation from stated investment particulars” and provided the company with information “regarding potential violations of its fiduciary and related duties” to investors.
He claimed that in response Delaware gave him a verbal warning, threatened to sack him and demanded a written apology “if he wished to remain employed”. In November, 2015, the company stopped asking him to approve documents provided to the SEC and “sought to isolate him from investment decisions”, he said.
He said he complained to Mr Nutt by email on November 27, 2015, saying the failure to ask him to sign off on the SEC reports, together with Delaware’s “ongoing practice of sending incomplete or inaccurate information to the SEC and shareholders”, violated the Sarbanes-Oxley Act, which regulates accounting disclosures in the US.
Mr Nutt allegedly replied by telling Mr Lombardi his concerns were “misplaced”.
Mr Lombardi told the court he also complained to Mr Nutt that the fund was not following its own rules for buying and selling shares and as a result “remained overweighted in a number of sectors, notably energy”. Delaware’s “failure to follow its stated fundamental research and quantitative investment process resulted in additional, unnecessary risk to shareholders and was not consistent with the risks identified to shareholders in publicly available documents”, he said.
He alleged after the complaint, Mr Nutt began to question him “regarding routine and trivial matters including, without limitation, his expense report”.
Mr Lombardi said he “understood defendant Nutt to be seeking excuses to criticise his performance in retaliation for his ongoing engagement in protected activity” as a whistleblower.
He claimed further retaliation by Mr Nutt over the next two months included excluding him from meetings, pressuring him to “rush” stock research and attempting to prevent him from meeting investors.
During the same period, Mr Lombardi said he told Delaware and Mr Nutt “that marketing materials or ‘pitch books’ were inaccurate and did not reflect investment practices actually employed by fund managers”.
“Plaintiff complained to defendant Nutt that the inaccurate pitch books would lead shareholders to purchase the fund based on incorrect representations made by the fund,” he said.
Mr Lombardi said he escalated his complaints to Mr Nutt’s superiors but on February 9, 2016, was sacked, “effective immediately”.
He said the only reason he was given was that Delaware was “going in a different direction”.
Delaware closed the fund to most new investors in October 2016, reopening it in May last year.
On October 31 last year, shortly after settling with Mr Lombardi, Macquarie announced that Mr Nutt would be retiring from Delaware on July 15.
SEC documents show the regulator’s investigation has its genesis in late November 2016, around the same time Mr Lombardi filed his lawsuit, when commission officers met with his lawyer, Katherine Oeltjen of Philadelphia-based firm Console Law.
Another person, whose name has been redacted by the SEC but who appears to be Mr Lombardi, was also present at the meeting.
On December 1, 2016 the SEC wrote to Ms Oeltjen asking for documents “related to the subject of our meeting on Tuesday” including research reports and communications with the SEC and clients “containing misstatements”.
The material requested included the “pitch books” Mr Lombardi complained about in his lawsuit, together with internal Delaware emails and examples of his research reports.
In March 2017, the SEC wrote to Delaware demanding documents dating back to January 1, 2014, including the pitch books and research reports covering companies including Xerox, Oracle, Halliburton and Exxon Mobil.
In its letter, the SEC also sought documents showing how portfolio managers voted on trading in the 14 stocks, together with any compliance system alerts related to trading in the same clutch of blue chips.
The SEC also asked for documents showing how the fund calculated how much it was prepared to pay for stocks.
And it requested information about the drafting of its reports to the SEC, including “the procedure for dealing with any dissenting opinions, if any” and “the personnel or human resources files for all individuals service (or who have served) as a portfolio manager to the fund, including copies of all signed employment, nondisclosure, and severance agreements (if applicable)”.