A compliance company has found itself in the unusual position of being the target of a public, $100 million lawsuit filed by its own client.
Chatham Asset Management, a $6 billion hedge fund, is seeking a nine-digit award from Adviser Compliance Associates (ACA) following a $19 million-plus settlement made with the Securities and Exchange Commission (SEC) in 2023.
Last April, Chatham and its founder, Anthony Melchiorre, agreed to pay more than $19 million over accusations of improper trading. The SEC alleged that Chatham traded bonds of American Media, the longtime owner of the National Enquirer, and utilized external brokerages to shift investments at elevated prices among the funds it managed.
In the lawsuit, Chatham asserts that ACA, an external consulting firm, failed to prevent the trading practices that led to the SEC probe. The $100 million it seeks includes not just the costs of settling the SEC investigation, but also damages for harm to its business.
Chatham claims that ACA provided improper advice and did not flag problematic trades. Melchiorre, known for his aggressive investment style, says Chatham sought, received and followed advice from ACA, believing that certain trading practices were compliant with SEC rules. However, the hedge fund alleges that ACA’s advice was faulty.
ACA, on the other hand, attempted to have the case dismissed, arguing that Chatham is trying to shift blame.
“Nothing in the complaint ‘alleges that Chatham ever informed ACA that it was pre-arranging the sales prices of the bonds, or that ACA knew of the practice, much less that ACA advised Chatham to engage in it,’” ACA’s attorneys argued, according to a Bloomberg report.
The legal battle is set to proceed in federal court in New Jersey.
Our Thoughts
This situation is unusual for several reasons. For instance, the SEC settlement with Chatham didn’t name or fault ACA in the case. And Melchiorre has taken an aggressive path by making the fight public.
To be clear, there still hasn’t been an official indication or ruling that ACA shirked their duties. Regardless, the case is a stark reminder of the potential consequences if a compliance firm falls short.
Compliance teams should always implement a four-eye review to ensure regulatory adherence, detect potentially fraudulent activities, and maintain clients’ financial integrity. These reviews also help enhance accountability, making it clearer who is responsible for the specific aspects of financial compliance.
At ACC, we believe in bringing in the necessary expertise and counsel for complex or potentially problematic situations. We offer proactive compliance solutions, including outsourced CCO support, for the investment management community. Contact us to schedule a consultation.
