By Cyril Tuohy
Holding advisors to a fiduciary duty standard may sound like a simple mandate, at least on paper. When it comes to the real world, though, the boundaries of an advisor’s responsibilities and the conflicting allegiances shift like the ebb and flow of the North Carolina tide.
In a case that sheds some light on the sometimes-cozy world of advisors, investment companies and the boards that control them, look no further than Chariot Advisors, a registered investment advisor in Cary, N.C.
Chariot Advisors and its former owner and sole operator, Elliott L. Shifman, stand accused by the U.S. Securities and Exchange Commission (SEC) of misleading the board of the Chariot Fund, a mutual fund for which Chariot Advisors was the sole advisor.
Chariot Fund, which was an option available to investors between December 2008 and August 2011 within Northern Lights Variable Trust, was under the supervision of the Northern Lights Board of Trustees with headquarters in Omaha, Neb., according to government documents.
Chariot Fund, government documents allege, also was offered to investors in the Vector I and II variable annuities developed for Midland National Life Insurance, which Shifman, a registered representative, sold to investors through the broker-dealer SummitAlliance Securities and the Raleigh, N.C.-based “unregulated entity” called Outer Banks Financial, of which Shifman is still president and chief operating officer.
Shifman, according to a civil suit filed by the SEC, promised the Chariot Fund board that a proprietary foreign exchange currency trading platform could deliver superior returns to investors. In fact, Chariot Advisors never had the ability to do that, the SEC complaint said.
“It is critical that investment advisors provide truthful information to the directors of the registered funds they advise,” said Julie M. Riewe, co-chief of the asset management unit within the SEC’s enforcement division, according to the complaint. “Both boards and advisors have fiduciary duties that must be fulfilled to ensure that a fund’s investors are not harmed.”
The SEC has asked for a hearing in the case before an administrative law judge.
Shifman, a fellow of the Society of Actuaries, a registered investment advisor (RIA) and a former senior executive of a life insurance company, said he has done nothing wrong.
“Mr. Shifman is very disappointed by the staff’s decision to institute a proceeding,” Shifman’s attorney Jeffrey D. Barclay, said in an e-mail to InsuranceNewsNet. “He believes he acted in good faith and in the best interests of investors, and looks forward to his hearing before an administrative law judge.”
Barclay declined to elaborate.
In 2008, Shifman approached the Northern Lights Board of Trustees about creating the Chariot Fund with Chariot Advisors as the new fund’s advisor. Chariot Advisors would invest 80 percent of the fund’s assets in short-term fixed income securities, and the remainder would be used to engage in “algorithmic currency trading,” according to the SEC documents.
Shifman described the strategy for the Chariot Fund as providing “a currency arbitrage overlay on top of fixed income securities,” and Chariot Advisors would use high frequency trading techniques to exploit inefficiencies in currency markets, the SEC said.
For its services, Chariot Advisors would charge the Chariot Fund a 1 percent advisory fee on assets under management and a 0.6 percent distribution fee. Northern Lights Board of Trustees approved the deal in early 2008.
When the board got wind of Shifman’s intention to sell Chariot Advisors on June 30, 2009, two weeks before the launch of the Chariot Fund in mid-July, the board met to reconsider. Shifman said Chariot Advisors would continue with its proprietary currently trading strategy, but for a higher advisory fee but smaller distribution fee.
In fact, Chariot Advisors never had any such proprietary trading abilities, and between 2008 and 2009, Chariot Advisors and Shifman defrauded the Chariot Absolute Return Currency Portfolio, the SEC complaint said.
In addition, Chariot Advisors misrepresented its currency trading abilities on prospectuses to investors in violation of the Investment Company Act of 1940, the Investment Advisers Act of 1940 and the Securities Exchange Act of 1934, the SEC also said.
Instead, Chariot Advisors, which had been sold by Shifman on June 30, 2009, launched Chariot Fund July 15, 2009, with assets amounting to $17 million in the form of annuities held in a sub-account of Midland National Life Insurance’s variable annuity platform.
Chariot simply hired a currency trader to execute trades using standard techniques, but she was fired Sept. 30, 2009, for poor trading performance.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].
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