The Securities and Exchange Commission has pressed charges against a New York investment advisor for misleading investors about the management of risk in a mutual fund.

Catalyst Capital Advisors LLC (CCA) and its CEO Jerry Szilagyi have agreed to pay a combined $10.5 million to settle the charges.  The SEC also lodged a complaint in federal district court in Madison in Wisconsin against Edward Walczak, a senior portfolio manager, for fraudulently misrepresenting the way in which he proposed to manage risk on the fund's behalf.

The SEC's order against the firm says 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 corrective action between December 2016 and February 2017. The fund lost hundreds of millions of dollars – approximately 20% of its value – as markets moved against it. The SEC's complaint against Walczak alleges that he wrongly told investors that the fund employed a risk management strategy involving safeguards to prevent losses of more than 8%.

The SEC's order says that CCA broke the anti-fraud provisions of the federal securities laws and that Szilagyi failed to supervise Walczak reasonably. Without admitting or denying the findings, CCA and Szilagyi agreed to be censured, to cease and desist from future misdeeds and to undertak certain tasks. 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 SEC's complaint against Walczak alleges that he committed the same offences and seeks a permanent injunction, disgorgement of ill-gotten gains, and a civil penalty. In a parallel action, the Commodity Futures Trading Commission (CFTC) has announced settled charges against CCA and Szilagyi and a district court action against Walczak.