On June 30, 2025, the SEC announced it had obtained final judgments in federal district court in a lawsuit brought against two affiliated investment advisers and their two portfolio managers for breaches of fiduciary duty and material misrepresentations relating to their risk management practices and risks of options strategies employed for a registered mutual fund and several private funds, which collectively incurred losses of over $1 billion in February 2018. Each of the defendant advisers and portfolio managers consented to the entry of the applicable final judgment without admitting or denying the allegations in the SEC’s complaint.

According to the SEC’s complaint filed on May 27, 2021, the advisers employed “short options” or “short volatility” trading strategies for the funds, consisting of writing (selling) short-dated, out-of-the-money options on S&P 500 futures contracts, designed to hedge against declines in the S&P 500 futures market and to benefit from higher volatility market environments.  The advisers offered these strategies in three variants, available in the mutual fund, the private funds and/or a separately-managed account, which differed in the targeted range of returns and amount of hedging provided.  In communications to investors and financial advisers as well as to the mutual fund board, the defendants made various representations regarding the risk management practices employed for the funds, including that the funds’ portfolios were stress tested against historic market events and that the funds were managed to maintain a consistent level of portfolio risk regardless of market conditions.  The defendants also disclosed to investors and financial advisers worst-case loss estimates for each variant of the options strategy.  The SEC alleged that such worst-case loss estimates “were false” and “were neither based on, nor consistent with, any stress testing performed by [the advisers] based on historical market scenarios” and that such stress testing projected losses for the funds that were “significantly larger” than the estimates disclosed to investors. Additionally, the defendants made representations regarding their risk management practices, including with respect to their utilization of daily risk reporting, to the mutual fund board in connection with the advisory contract renewal process pursuant to Section 15(c) of the Investment Company Act of 1940, which the SEC alleged were false and misleading.

According to the SEC’s complaint, from late 2017 to early 2018, during a low volatility environment, the defendants, in seeking to achieve greater returns, made investments that significantly increased the risk of loss in the funds, while disclosing to investors that they were maintaining consistent risk profiles for the funds.  In early February 2018, the S&P 500 Index fell more than 6% and the CBOE Volatility Index increased 177% over two consecutive trading days.  As a result, in order to comply with margin requirements imposed by the futures commission merchant for the funds, the funds incurred trading losses of more than $1 billion, or approximately 80% of their value.

The final judgments permanently enjoined each of the defendants from violations of various antifraud provisions of the federal securities laws, among other related violations cited in the judgments. In addition to ordering disgorgement of profits with prejudgment interest, the final judgments imposed $500,000 and $200,000 civil penalties, respectively, on the two portfolio managers and enjoined them for three years and one year, respectively, from managing or advising on securities investments for, or acting as or being associated with an investment adviser to, any third party, except for their wives and children.

The SEC’s litigation release announcing the final judgments is available here.  The SEC’s original complaint is available here.