BlueCrest Capital, the investment firm headed by billionaire trader Mike Platt, will return $ 170 million to former investors after the U.S. Securities and Exchange Commission said it prioritized an internal hedge fund over the flagship fund in which they had invested.
The London-based company had shifted its main traders from the flagship fund to an internal entity that only managed the personal wealth of its founders, while leaving outside investors to rely on an underperforming algorithm, the SEC said.
The settlement announced on Tuesday – in which BlueCrest neither admitted nor denied the SEC’s claims – highlighted conflicts of interest that can arise when investment firms have segregated funds for their employees and outside investors .
“BlueCrest has repeatedly failed to act in the best interests of its investors, including failing to disclose that it is moving its top performing traders to a fund that benefits its own staff at the expense of its investors,” said Stephanie Avakian, director of the SEC’s enforcement division.
BlueCrest managed $ 36 billion at its peak, but stopped handling outside money in 2015. The misleading disclosures at issue in the SEC case occurred between 2011, when BlueCrest created its in-house fund, and the end of 2015.
“We are pleased to have resolved this issue which mainly involved disclosures that were made over five years ago,” BlueCrest said in a statement, adding that it had generated returns of $ 22 billion for the companies. investors in the 15 years he was managing outside money.
“Today’s order bears no relation to our current business operations,” he added.
The internal fund in question, called BSMA, was created in 2011 to manage the money of BlueCrest employees and to encourage its staff to stay with the company. According to the SEC, BlueCrest has moved its top traders to BSMA and away from the company’s flagship fund, BCI.
At the same time, BlueCrest began to manage large segments of the BCI portfolio through an algorithm that replicated trades from live traders with a one-day delay. The algorithm was called “Rates Management Trading” or RMT and allowed BlueCrest to make bigger profits because it didn’t have to pay performance commissions to traders on money managed this way.
The SEC said RMT’s overnight trading gave it “a particularly poor performance in volatile markets because RMT waited too long to respond to sudden market movements,” as the tantrum typed in 2013.
Despite these significant changes in its operations, BlueCrest only made vague disclosures to investors about its in-house BSMA fund until 2014, when it was discovered by an outside due diligence consultant, according to the SEC.
BlueCrest also allegedly failed to inform its independent directors until 2015 of the amount of capital managed through its RMT system, which was sometimes up to half of BCI’s money.
Significant withdrawals by investors from BCI after the discovery of BSMA resulted in the closure of BCI in 2015, according to the order of the SEC.