Posted on 05/30/2021
The Securities and Exchange Commission (SEC) filed a civil action alleging that investment advisers LJM Funds Management Ltd. and LJM Partners Ltd. and their portfolio managers, Anthony “Tony” Caine and Anish Parvataneni, fraudulently misled investors and the board of directors of a fund they advised about LJM’s risk management practices and the level of risk in LJM’s portfolios. The SEC separately settled related charges with LJM’s Chief Risk Officer, Arjuna Ariathurai.
According to the SEC’s complaint, LJM adopted a short volatility trading strategy that carried risks that were remote but extreme. The complaint alleges that, in order to ease investor concerns about the potential for losses, LJM, Caine and Parvataneni made a series of misstatements to investors and the mutual fund’s board about LJM’s risk management practices, including false statements about its use of historical event stress testing and its commitment to maintaining a consistent risk profile instead of prioritizing returns. The complaint further alleges that, beginning in late 2017, during a period of historically low volatility, LJM, Caine, and Parvataneni increased the level of risk in the portfolios in order to chase return targets, while falsely assuring investors that the portfolios’ risk profiles remained stable. According to the complaint, in February 2018, the markets suffered a large spike in volatility, resulting in catastrophic trading losses exceeding US$ 1 billion, or more than 80% of the value of the funds LJM managed, over two trading days. LJM got caught in the Volmageddon event, which occurred in 2018. On February 5, 2018, the Cboe Volatility Index, a measure of expected volatility in the S&P 500 Index, jumped by a record 20 points to a level that hadn’t been seen in years. VelocityShares Daily Inverse VIX Short-Term note (ticker XIV) blew up spectacularly on February 5, 2018, falling from US$ 1.9 billion in assets to US$ 63 million in one session.
In parallel actions, the Commodity Futures Trading Commission (CFTC) announced charges against LJM, Caine, Parvataneni, and Ariathurai.
Caine rebutted the SEC charges issuing a statement, “We categorically deny all of the SEC’s and CFTC’s assertions, have summarily rejected their respective settlement offers, and will vigorously defend ourselves. We will demonstrate that the risk of loss was fully disclosed, LJM did not deviate from historical portfolio and risk management practices, and the losses sustained on February 5-6, 2018, occurred as a result of events outside of LJM’s control.”
He adds, “The suggestion that LJM committed fraud has no factual basis and is undermined by the fact that I personally lost over $100 million on February 5-6, 2018, and LJM portfolio managers invested more than $500,000 new capital on February 1, 2018, in the same funds as LJM investors.
The event is known as Volmageddon that caused the collapse of multiple investment firms involved a single-day increase in the VIX Index of 20.01 points or 115%, more than double the previous largest single-day percentage move. According to an analysis by Integritas Financial Consulting, this increase was a 13.7 standard deviation event or the equivalent to the probability of the same person being hit by lightning 1,000 times.”