BlueCrest Capital Management hedge fund to pay $170 million to settle SEC charges for failure to disclose internal investment fund

BlueCrest Capital Management hedge Fund will pay $170 million to settle with the U.S. Securities and Exchange Commission over charges that it misled clients about an internal fund used to invest company insiders’ wealth, which was managed by the firm’s best traders, the SEC said Tuesday.

The Securities and Exchange Commission said that the investigation arose from inadequate disclosures, material misstatements, and misleading omissions concerning its transfer of top traders from its flagship client fund, BlueCrest Capital International (BCI), to a proprietary fund, BSMA Limited, and replacement of those traders with an underperforming algorithm.

According to the SEC’s, BlueCrest created BSMA to trade the personal capital of BlueCrest personnel using trading strategies that overlapped with BCI’s.  Also,  members of BlueCrest’s governing body, which made the relevant decisions regarding BSMA, had a 93 percent ownership interest in BSMA that peaked at $1.79 billion compared to its ownership interest of approximately $619 million in BCI.

The SEC said over more than four years, BlueCrest made inadequate and misleading disclosures concerning BSMA’s existence, the movement of traders from BCI to BSMA, the use of the algorithm in BCI, and associated conflicts of interest.  According to the order, BlueCrest transferred a majority of its highest-performing traders from BCI to BSMA, and assigned many of its most promising newly hired traders, eligible to trade for either fund, to BSMA.

“An adviser’s disclosures to investors and prospective investors in funds they manage must be accurate,” said Adam Aderton, Co-Chief of the SEC’s Asset Management Unit.  “BlueCrest investors were marketed a fund with exceptional trading talent but instead got a fund with an undisclosed algorithm that performed worse than those touted traders.”

The SEC’s order finds that BlueCrest willfully violated antifraud provisions of the Securities Act of 1933 and Investment Advisers Act of 1940 as well as the Advisers Act’s compliance rule.  Without admitting or denying the SEC’s findings, BlueCrest agreed to a cease-and-desist order imposing a censure, and must pay disgorgement and prejudgment interest of $132,714,506 and a penalty of $37,285,494, all of which will be returned to investors.

The SEC’s investigation was conducted by Asset Management Unit members Marilyn Ampolsk, Marie DeBonis, Brian Fitzpatrick, and Luke Pazicky, and supervised by Ranah Esmaili.  The Enforcement Division appreciates the assistance of staff from the Office of Compliance Inspections and Examinations, including the Quantitative Analytics Unit, and the Division of Economic and Risk Analysis.  The Enforcement Division also wishes to thank the UK’s Financial Conduct Authority for its assistance.

Jeffrey Newman represents whistleblowers nationwide including SEC whistleblowers relating to violations of securities laws by financial advisors and hedge funds. He can be reached at Jeffrey.Newman1@gmail.com or at newmanshapiro.com