BlueCrest Capital Busted for Placing Best Interests of Personnel Capital over Fund Investors

Posted on 12/09/2020

The Securities and Exchange Commission (SEC) announced that U.K.-based investment adviser BlueCrest Capital Management Limited has agreed to pay US$ 170 million to settle charges arising from inadequate disclosures, material misstatements, and misleading omissions concerning its transfer of top traders from its flagship client fund, BlueCrest Capital International (BCI), to a proprietary fund, BSMA Limited, and replacement of those traders with an underperforming algorithm. The SEC’s order finds that BlueCrest willfully violated antifraud provisions of the Securities Act of 1933 and Investment Advisers Act of 1940 as well as the Advisers Act’s compliance rule. Without admitting or denying the SEC’s findings, BlueCrest agreed to a cease-and-desist order imposing a censure, and must pay disgorgement and prejudgment interest of US$ 132,714,506 and a penalty of US$ 37,285,494, all of which will be returned to investors.

The SEC will distribute the US$ 170 million to harmed investors. At its zenith, BlueCrest had overseen US$ 36 billion in assets under management.

According to the presss release, “According to the SEC’s order, BlueCrest created BSMA to trade the personal capital of BlueCrest personnel using primary trading strategies that overlapped with BCI’s. As set forth in the order, members of BlueCrest’s governing body, which made the relevant decisions regarding BSMA, had a 93 percent ownership interest in BSMA that peaked at $1.79 billion compared to its ownership interest of approximately $619 million in BCI.

The order finds that, over more than four years, BlueCrest made inadequate and misleading disclosures concerning BSMA’s existence, the movement of traders from BCI to BSMA, the use of the algorithm in BCI, and associated conflicts of interest. According to the order, BlueCrest transferred a majority of its highest-performing traders from BCI to BSMA, and assigned many of its most promising newly hired traders, eligible to trade for either fund, to BSMA.

The order also finds that BlueCrest failed to disclose that it reallocated the transferred traders’ capital allocations in BCI to a semi-systematic trading system, which was essentially a replication algorithm that tracked certain trading activity of a subset of BlueCrest’s live traders. The order finds that BlueCrest did not disclose certain material facts about the algorithm to BCI’s independent directors. According to the order, the algorithm generated significantly less profit with greater volatility than the live traders. The order finds that BlueCrest was able to keep more of any performance fees generated by the algorithm than by live traders.”

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