NASD Fines Altegris Over Hedge Funds
In the first crackdown in its campaign to prevent abuses in the hedge-fund industry, the NASD on Tuesday said it fined La Jolla-based Altegris Investments $175,000 for failing to disclose hedge-fund risks in sales literature it sent investors.
The NASD, formerly known as the National Assn. of Securities Dealers, also slapped Altegris’ chief compliance officer, Robert J. Amedeo, with a censure and $20,000 fine for failing to adequately supervise the firm’s marketing.
By NASD standards, these were stiff penalties for infractions that neither involved fraud nor arose from consumer complaints, but officials said they wanted to send a strong message to the securities industry and head off problems before hedge funds gain a strong foothold with individual investors.
“The time to bring these cases is before there are customer losses and widespread sales to consumers,” said Barry R. Goldsmith, the NASD’s executive vice president for enforcement.
The NASD’s action comes as the Securities and Exchange Commission and Congress also are stepping up their scrutiny of hedge funds, which are lightly regulated investment pools formerly available only to institutional investors such as pension funds and insurance companies and to extremely well-heeled individuals. Because of their use of leverage -- or borrowing -- and strategies such as “short selling,” hedge funds traditionally have been considered too risky for ordinary investors.
However, with the stock market in a three-year swoon and many hedge funds showing positive returns with low volatility, the funds are gaining cachet. Some brokerages and mutual fund firms have begun offering middle-income investors products that invest in hedge funds or employ similar strategies.
“There is definitely a push toward advertising [hedge funds] to smaller investors,” said Mary L. Schapiro, NASD vice chairman and president of regulatory policy.
The NASD launched its new focus on hedge funds last year with a survey of the broker-dealers it regulates, asking the extent of their hedge-fund involvement. Firms offering such products were asked to provide all associated marketing literature, which is how the Altegris material came to the NASD’s attention, Goldsmith said.
The NASD said that between October 2002 and February 2003, Altegris sent customers 26 pieces of advertising literature on specific hedge funds. All 26 violated NASD rules by failing to disclose, for example, that a fund was speculative and high-risk, that fees and expenses could exceed profits, and that there could be restrictions on investors selling their shares.
The sales material also included two research reports on specific hedge funds -- written by another brokerage firm -- that contained “several exaggerated and unwarranted statements and claims,” the NASD said. NASD officials did not identify the firm that wrote the reports and declined to describe its relationship with Altegris.
One of the reports, discussing whether a hedge fund manager is likely to continue his strong performance over the next four to five years, concluded, “I think it is likely he will.” The NASD said this testimonial violated its rules against projecting an investment’s future performance.
The same research report erroneously asserted that the NASD would audit the fund in question, adding: “For some, this layer of regulatory oversight is comforting.” The NASD said there are no such audits.
Amedeo, in an interview Tuesday, said that none of the advertising literature was mass-marketed. It went only to Altegris customers who met the income and net-worth qualifications appropriate for such investments, he said.
Amedeo, a former SEC lawyer, added that the marketing literature was accompanied -- sometimes in the same envelope, sometimes in separate mailings -- by formal documents that contained all the appropriate disclosures about risk.
“What’s important for us is that these were advertising violations, not fraud,” Amedeo said.
