Sec.gov SEC charges portfolio manager Ed Walczak and advisory firm Catalyst Capital Advisors (CCA) Catalyst Funds with misrepresenting risk in mutual fund

1. 3/12/2020 SEC.gov | SEC Charges Portfolio Manager and Advisory Firm with Misrepresenting Risk in Mutual Fund
https://www.sec.gov/news/press-release/2020-21 1/1
Washington D.C., Jan. 27, 2020 —
SEC Charges Portfolio Manager and Advisory
Firm with Misrepresenting Risk in Mutual Fund
FOR IMMEDIATE RELEASE
2020-21
The Securities and Exchange Commission today announced charges against a
New York-based investment adviser for misleading investors about the management of risk in a mutual
fund. Catalyst Capital Advisors LLC (CCA) and its President and Chief Executive Officer, Jerry Szilagyi, agreed to
pay a combined $10.5 million to settle the charges. The SEC also filed a complaint in federal district court in
Madison, Wisconsin, against Senior Portfolio Manager, Edward Walczak, for fraudulently misrepresenting how he
would manage risk for the fund.
The SEC's settled order against CCA and Szilagyi finds that, although CCA told investors that it abided by a strict
set of risk parameters for the Catalyst Hedged Futures Strategy Fund, it breached those parameters and failed to
take the required corrective action during a majority of the trading days between December 2016 and February
2017. As alleged, the fund lost hundreds of millions of dollars – approximately 20% of its value – from December
2016 through February 2017 as markets moved against it. The SEC's complaint against Walczak alleges that he
told investors that the fund employed a risk management strategy involving safeguards to prevent losses of more
than 8%, when in fact no such safeguards limited losses and Walczak did not otherwise consistently manage the
fund to an 8% loss threshold.
"Fund managers must be truthful and transparent when describing their risk management procedures," said C.
Dabney O'Riordan, Co-Chief of the SEC Enforcement Division's Asset Management Unit.
Daniel Michael, Chief of the Division's Complex Financial Instruments Unit, added, "Here, CCA's
misrepresentations, and Walczak's alleged departure from his stated approach to managing risk, deprived
investors of accurate information about an important aspect of the fund's management."
The SEC's order finds that CCA violated the antifraud provisions of the federal securities laws, and that Szilagyi
was a cause of CCA's violations and failed reasonably to supervise Walczak. Without admitting or denying the
findings, CCA and Szilagyi agreed to be censured, to cease and desist from future violations, and to certain
undertakings as described in the order. CCA agreed to pay disgorgement of $8,176,722 plus prejudgment interest
of $731,759, and a civil penalty of $1,300,000. Szilagyi agreed to pay a civil penalty of $300,000. The payments
will be placed in a fair fund for distribution to affected investors. The SEC's complaint against Walczak alleges that
he violated the antifraud provisions of the federal securities laws and seeks a permanent injunction, disgorgement
of ill-gotten gains, and a civil penalty. In parallel action, the Commodity Futures Trading Commission (CFTC) today
announced settled charges against CCA and Szilagyi, and a district court action against Walczak.
David Benson and Paul Montoya of the Asset Management Unit, Jake Schmidt and Jeffrey Shank of the Complex
Financial Instruments Unit, and Terrence Moran conducted the investigation out of the SEC's Chicago Regional
Office. The SEC's litigation against Mr. Walczak will be conducted by Senior Trial Counsel Michael Foster and
Messrs. Benson and Schmidt. The related SEC examination of CCA was conducted by Linda Heaphy, Kathleen
Furey, Kirk Lawrence, Edward Moy, and William Delmage of the SEC's New York Regional Office. The SEC
acknowledges the assistance of the CFTC.
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Related Materials
SEC Order
SEC Complaint
Press Release