SEC Charges Tied to the Lack of An Algorithm

by Dorsey & Whitney LLP
Contact

High speed trading and the use of algorithms is a key topic of debate. An investment strategy centered on an algorithm for use in the currency markets is at the center of a settled administrative proceeding filed by the Commission. The difficulty in the case was not high speed trading or the algorithm. It was that the algorithm did not exist. In the Matter of Chariot Advisors, LLC, Adm. Proc. File No. 3-2014 (July 3, 2014).

Chariot Advisors is a registered investment adviser. Respondent Elliot Shifman was its sole owner from September 2008 through the end of June 2009. In late 2008 Mr. Shifman approached Northern Lights Variable Trust, a registered open-ended management investment company, with a request that it create the Chariot Fund as a series with Chariot Advisors as the new fund’s advisor.

In response to a request for additional information Mr. Shifman prepared a presentation for the Board, detailing the proposal. The presentation represented in part that the new fund would be “a currency overlay product” and would use a trading algorithm similar to one in use by another party. The new fund would thus be a "byproduct of extensive research of recent changes in FX market structure due to the adaption of algorithmic and high frequency trading" the presentation claimed. The representations were reiterated by Mr. Shifman at a Board meeting.

The board approved the Chariot Fund as a series of Northern Lights. Chariot Advisors was approved as the adviser.

Subsequently, Mr. Shifman took steps to sell Chariot Advisors. He entered into a contract in mid-May 2009 for the sale, effective June 30, 2009. In view of the contract the Board requested a second presentation. The second presentation largely reiterated the statements from the first. At the time of the presentation the Fund had prepared a draft prospectus for the proposed mutual fund. It essentially restated the statements made to the board by Mr. Shifman regarding algorithmic trading with some modifications.

On July 15, 2009 Chariot Fund launched. Chariot Advisors funded it by reallocating about $17 million in assets in clients’ annuities. The new fund operated for two months, conducting currency trading using technical analysis. It did not use an algorithm.

Throughout the negotiations leading to the launch of the Chariot Fund, and its initial operations, neither Chariot Advisors nor Mr. Shifman had an algorithm or model in place capable of conducting the currency trading he described. While Mr. Shifman had discussions with outside sources to obtain such an algorithm or model, he had not selected any particular model. There was no contract to obtain one.

The Order alleges violations of Section 15(c) of the Investment Company Act. That Section requires that the terms of any agreement to serve as an investment adviser of a registered investment company be approved by a majority of the disinterested directors. It also imposes a duty on the directors to request and evaluate such information as may be reasonably necessary for them to evaluate the terms of the agreement. Generally this means that the directors must obtain sufficient information to evaluate the nature, extent and quality of the services to be provided. The Order also alleges violations of Investment Company Act Section 34(b) and Advisers Act Sections 206(2) and 206(4).

Respondents resolved the proceeding. Chariot Advisors consented to the entry of a cease and desist order based on Section 34(b) of the Investment Company Act. Mr. Shifman consented to the entry of a cease and desist order based on Section 206(2) of the Advisers Act and Sections 15(c) and 34(b) of the Investment Company Act. Mr. Shifman also agreed to the entry of an order suspending him from the securities business or participating in any penny stock offering for a period of twelve months. He will pay a penalty of $50,000.

 

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Dorsey & Whitney LLP | Attorney Advertising

Written by:

Dorsey & Whitney LLP
Contact
more
less

Dorsey & Whitney LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.