(Bloomberg) - Hedge fund Chatham Asset Management and its founder, Anthony Melchiorre, agreed to pay more than $19 million to settle US allegations that the firm improperly traded bonds in a media company that owned the National Enquirer.
The Securities and Exchange Commission said the trades were executed at prices that lifted the value of American Media Inc. bonds at a significantly higher rate than those of similar securities. Neither Chatham nor Melchiorre admitted to or denied the SEC’s allegations.
Wall Street’s main regulator said Monday that Chatham and Melchiorre traded bonds in American Media, the publisher known for putting out the National Enquirer before the tabloid’s recent sale, in a way that resulted in one of its funds selling the securities and another one purchasing the same assets. The transactions boosted the price in bonds from American Media, which were generally illiquid, according to the agency. The firm is now known as a360 Media.
Chatham acquired a majority stake in American Media’s parent company in 2014. The firm said in a statement that Chatham sought, received and followed advice from an independent compliance consultant for the trades at issue.
“The consultant reviewed Chatham’s trading annually for compliance with applicable laws and did not alert the firm to any issues,” the statement said. “Importantly, the trading occurred more than four years ago in funds that have since been closed. The matter has been resolved and we are focused on generating returns for our investors.”
Chatham and Melchiorre agreed to pay penalties of $4.4 million and $600,000, respectively, in the settlement. They will also pay back $14.3 million in gains and interest from the trades. In addition to the monetary penalties, both Chatham and Melchiorre agreed to bars from the mutual fund industry — which Chatham had already exited — as a condition of the settlement.
The SEC alleged that violations occurred between 2016 to 2018. These bonds were illiquid, traded over-the-counter, and mostly owned by Chatham entities, according to the agency. But some Chatham funds allowed investors to pull their money any time, and some had restrictions on how much of the fund could be invested in one industry. This meant that Chatham would have to sell some American Media bonds from time to time.
Regardless, Chatham and Melchiorre still considered the bonds to be good investments even when they needed to meet redemptions, the SEC said. The regulator said Chatham sold the debt to brokers at prices proposed by Melchiorre, who then bought the bonds again with a different Chatham entity, sometimes at a slightly higher price to compensate the broker. The firm and its founder made over 100 of these types of trades, the SEC said.
The strategy kept the bonds in the Chatham network, and increased the value — and thus the fees — of Chatham funds, per the SEC. Clients paid Chatham an estimated $11 million in additional fees as a result of the trades.
In addition to a majority stake in a360 Media, Chatham also owns the McClatchy newspaper chain.
(Updates with case details throughout)
By Austin Weinstein
With assistance from Katherine Burton and Sridhar Natarajan
