Hedge Fund Fined For Soft Dollar Abuses



New York, NY – A few weeks ago, Senator Charles (Chuck) Schumer (D-NY) asked SEC Chairman Christopher Cox if his recent request that Congress consider eliminating or significantly revising the 28(e) soft dollar safe harbor was prompted by an indication of new soft dollar abuses.  Chairman Cox said no.  Unfortunately, earlier this week, the SEC settled a case with one hedge fund advisor for alleged soft dollar shenanigans.

This past Wednesday, the SEC said that it settled an action with one hedge fund advisor — Schultze Asset Management (SAM) — for misrepresenting its client commission, or soft dollar, practices to an advisory client.

Management at SAM, represented and certified three different times to an advisory client that the firm was using client commissions generated by the account only for expenses covered by the safe harbor provided by Section 28(e) of the Securities Exchange Act of 1934 when, in fact, SAM knowingly used client commissions generated by the account to pay for non-Section 28(e) expenses, including the salary of SAM’s principle, George J. Schultze.

In addition, SAM, used SAMCO (a related entity), to secure soft dollar payments from broker-dealers to cover some of SAM’s operating expenses. The SEC alleged that SAMCO had no business purpose other than to provide a vehicle by which SAM and Schultze could secure soft dollars to pay SAM’s operating expenses and Schultze’s personal expenses.

In an effort to conceal SAMCO’s role from the SEC’s examination staff, Schultze failed to provide to the staff with a key agreement relating to SAMCO and then gave the staff a modified version of a second agreement.

The SEC reported that SAM has agreed to pay $100,000 and its sole principal, George Schultze, agreed to pay $50,000 to settle the charges with admitting or denying the charges.

According to the SEC, SAM currently has about $733 million in assets under management, with about $629 million of those assets in hedge funds it manages.

Unfortunately, the settlement with Schultze Asset Management could not have come at a worse time, as it provides some evidence that soft dollar abuses are still taking place. 

The biggest question this case raises is whether any members of Congress decide to use this development as a reason to pick up the soft dollar issue and draft legislation to modify or eliminate the 28(e) safe harbor.


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