ETF Manager Settles SEC Charges of Fraudulent Conduct

The SEC has taken action against an ETF Manager, alleging misconduct in the management of an exchange-traded fund (ETF). This scheme involved misleading the ETF’s trustees and securing a whopping $20 million in rescue financing to avert potential bankruptcy. As a result, Masucci and his entities have agreed to a substantial settlement of $4.4 million. 

Deceptive Practices Unveiled

The SEC has charged Samuel Masucci and entities under his control. The SEC’s investigation revealed a series of deceptive maneuvers orchestrated by Masucci, who managed an exchange-traded fund (ETF). The key allegations revolve around disadvantaging the ETF and misleading its trustees to secure a massive $20 million in rescue financing, a move intended to stave off a looming threat of bankruptcy.

A Costly Agreement

The SEC’s findings suggest that in 2019, Samuel Masucci entered into an agreement that would have far-reaching consequences. In exchange for the substantial financing and other services amounting to $20 million, Masucci committed to retaining the ETF’s lucrative securities-lending business at a particular broker-dealer. Interestingly, alternative offers with more favorable terms from other securities lenders were available, which could have ultimately benefited the investors.

Concealing the Truth

What makes this case even more disconcerting is that Masucci deliberately kept the joint arrangement between himself, his firm, the fund, and the broker-dealer hidden from the fund’s Independent Trustees. Instead of disclosing the situation truthfully, he informed them that the fund had no viable alternatives, thus preventing them from making informed decisions.

SEC’s Stance on Accountability

Corey Schuster, Co-Chief of the SEC Enforcement Division’s Asset Management Unit, emphasized the significance of holding investment advisers accountable for their actions. Schuster stated, “Investment advisers cannot mislead clients or leverage client assets for their own benefit.” This enforcement action underscores the SEC’s unwavering commitment to ensuring firms and individuals face consequences for their misconduct.

Violations and Penalties

The SEC’s order identifies multiple violations in this case. Samuel Masucci and ETF Managers Group LLC (ETFMG), an SEC-registered investment adviser based in Summit, New Jersey, were found to have violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. Additionally, Masucci, ETFMG, and its parent company, Exchange Traded Managers Group LLC, were found to have violated Section 17(d) of the Investment Company Act of 1940 and Rule 17d-1 thereunder.

As part of the settlement, without admitting or denying the SEC’s findings, Samuel Masucci has agreed to a cease-and-desist order, a penalty of $400,000, and an associational bar under the Advisers Act. He also faces a prohibition under the Investment Company Act, with an option to reapply after a three-year period.

ETFMG and its parent company have also been subject to penalties, including censures, a cease-and-desist order, and joint and several civil penalties of $4 million.

Have a securities law question? Call New York Securities Lawyers at 212-509-6544.

Sallah Astarita & CoxRepresenting Advisors and Investors, Nationwide.
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