Listen to this article

A New Jersey advisory firm and its founder were charged in connection with allegedly improper trading of certain fixed income securities.

In an April 3 announcement, the Securities and Exchange Commission said that Chatham Asset Management LLC and founder Anthony Melchiorre agreed to pay more than $19.3 million in combined disgorgement, prejudgment interest and civil penalties to settle the charges.

According to the SEC, between 2016 and 2018, one client advised by Chatham Asset Management sold certain American Media Inc. bonds while another client advised by the firm purchased the same bonds through various broker-dealers. The commission alleged that these trades were undertaken to address portfolio constraints such as industry or issuer fund concentration limits, to meet investor redemptions, and to allocate capital inflows and outflows.

“These trades were executed at prices Chatham and Melchiorre proposed,” the agency said. “Over time, the prices at which Chatham and Melchiorre traded the securities in the Rebalancing Trades increased at a significantly higher rate than the prices of similar securities.”

“As our order finds, Chatham’s trading in AMI bonds had the effect of increasing the prices of those generally illiquid securities in a way that was disconnected from economic reality,” Division of Enforcement Deputy Director of the Sanjay Wadhwa said in a statement.

Based in its namesake municipality, Chatham Asset Management has been registered with the SEC as an investment advisor since 2012, according to the commission’s order. During the relevant period, Melchiorre owned approximately 70% of the firm. He also served as primary portfolio manager for all of its clients. AMI, now A360 Media LLC, is a omnichannel media company. According to the SEC, during the relevant period, the company was responsible for publications including US Weekly and The National Inquirer.

“Through the Funds’ ownership of AMI Parent,” the SEC stated, “Chatham and Melchiorre effectively controlled AMI and appointed two Chatham employees to AMI’s four-person board.”

The order from the SEC also found that Chatham and Melchiorre calculated net asset values – or NAVs – for client funds’ holdings using pricing data that was based, in part, on the trading prices of the securities. That, the SEC said, made NAVs for Chatham’s clients higher during the relevant period than they would have been if the subject trades were removed from the market for the AMI bonds, which then resulted in higher fees charged to clients.

“Accordingly, the Clients paid Chatham an estimated $11,000,000 in performance and/or management fees that they would not have in the absence of Chatham’s Rebalancing Trades,” the order states. “Chatham in turn paid approximately 55 percent of such fees to Melchiorre.”

The firm and Melchiorre consented to the SEC order without admitting or denying its findings that they violated Section 206(c) of the Investment Advisers Act of 1940, the commission said, and that they aided and abetted and caused violations of the Investment Company Act of 1940.

“Chatham sought, received and followed advice from an independent compliance consultant about the manner of executing the trading in question,” a spokesperson for Chatham Asset Management said in a statement to NJBIZ.  “The consultant reviewed Chatham’s trading annually for compliance with applicable laws and did not alert the firm to any issues. 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 Advisors and Melchiorre agreed jointly and severally to pay $11 million in disgorgement and approximately $3.4 million in prejudgment interest, in addition to respective civil penalties of $4.4 million and $600,000, the SEC said. Finally, the firm and Melchiorre agreed to prohibitions from serving in certain positions in the industry, pursuant to the Investment Company Act, a measure designed to minimize conflicts of interest.

“We remain vigilant in rooting out such misconduct in the marketplace, including in the fixed income sector, where investments can be less liquid,” Wadhwa stated.

Editor’s note: This story was updated at 11:06 a.m. ET on April 4, 2023, to include a statement from a representative for Chatham Asset Management.