CFTC Orders Commodity Pool Operator, CEO to Pay More Than $10 Million for Misleading Statements, Supervision Failures - The Industry Spread

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CFTC

CFTC Orders Commodity Pool Operator, CEO to Pay More Than $10 Million for Misleading Statements, Supervision Failures

January 31, 2020

CFTC - Misleading StatementsWashington, D.C. — The Commodity Futures Trading Commission today issued an order filing and simultaneously settling charges against Catalyst Capital Advisors LLC, of Huntington, New York, and its CEO, Jerry Szilagyi, for materially misleading statements made by Catalyst and one of its portfolio managers, and for failing to implement an adequate supervisory system to prevent such misstatements.  Separately, the CFTC charged the portfolio manager, Edward Walczak, of Madison, Wisconsin, with fraud in a complaint filed in the U.S. District Court for the Western District of Wisconsin.

The order requires Catalyst, a registered commodity pool operator, to pay a $1.3 million civil monetary penalty and $8,908,481 in disgorgement (including pre-judgment interest).  The order also requires Szilagyi to pay a $300,000 civil monetary penalty.  Catalyst and Szilagyi are ordered to cease and desist from further violations of the Commodity Exchange Act (CEA) and CFTC regulations, as charged.

James McDonald, CFTC’s Director of the Division of Enforcement
James McDonald, CFTC’s Director of the Division of Enforcement

“We are committed to protecting investors—including those who invest in our markets through mutual funds,” said CFTC Director of Enforcement James McDonald.  “As this case shows, when companies or individuals make misleading statements about the risks of investing in their products—statements that go to the heart of any investment decision—they will be held accountable.”   

Joshua Sterling, Director of the CFTC Division of Swap Dealer and Intermediary Oversight, added:  “The Commission’s disclosure requirements are a critical component of ensuring that commodity pool investors have the full protections afforded to them and for promoting the integrity, resilience, and vibrancy of our markets. We will continue to support Enforcement’s efforts to ensure that commodity pool operators play by the rules.”

The order finds that Catalyst and its agents made representations regarding risk management of the Catalyst Hedged Futures Strategy Fund (the “fund”) that were materially misleading.  Specifically, Catalyst is found liable for the misstatements of the fund’s portfolio manager regarding his management of the Fund’s risk, as well as Catalyst’s misrepresentations that stop-loss measures were in place to limit losses, when in fact no such measures existed.  Additionally, while Catalyst represented that a dedicated risk manager monitored the fund’s risk metrics daily, the risk manager did not actually do so.  The order concludes that Catalyst failed to implement or maintain adequate procedures to ensure that those acting on its behalf did not make misrepresentations to investors or investment advisors.  Finally, the order finds Szilagyi liable as a control person for Catalyst’s violations.

In the complaint filed against Walczak, the CFTC alleges that, from at least November 2014 to February 2017, Walczak led investors or investment advisors to believe that the fund was a safer investment than it actually was. Among other things, the complaint alleges that Walczak falsely told investment advisors that he took specific steps to prevent the fund from losing more than 8 percent of its value.  The complaint alleges that Walczak routinely failed to hedge in the manner he said he did, ultimately resulting in at least $500,000,000  of investor losses.

The Securities and Exchange Commission (SEC) today also issued an order filing and settling similar charges against Catalyst and Szilagyi, and filed a complaint against Walczak in federal court.  Per the terms of the CFTC and SEC orders, each agency will give credit for monetary sanctions paid by Catalyst and/or Szilagyi to the other.  Moreover, per the terms of the SEC order, a Fair Fund will be established for the benefit of affected investors.

In its continuing civil litigation against Walczak, the CFTC seeks, among other relief, disgorgement of benefits from violations of the CEA and CFTC regulations, restitution, civil monetary penalties, registration bans, and permanent injunctions against future violations of the federal commodities laws, as charged.

The CFTC appreciates the cooperation and assistance of the SEC in this matter.

The Division of Enforcement staff members responsible for this case are Sam Wasserman, Michael Cazakoff, Candice Aloisi, John Buffington, Lenel Hickson, Jr., and Manal M. Sultan.

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