SEC sues former portfolio manager for fraud
December 21, 1998
The SEC has sued a former money market fund portfolio manager for fraud, saying he misled investors about the value of derivatives he purchased for the funds.
Michael P. Traba, who managed two money market funds for The First National Bank of Chicago, ordered the fund administrator to set prices for derivatives based on a valuation method which Traba knew or should have known would provide inflated valuations, the SEC alleged in an administrative complaint filed Dec. 10. The funds, the Cash Management Fund and the MM Series Fund, would have had a net asset value of below $1.00 per share on at least eight occasions in 1994 had the derivatives been properly valued, the SEC alleged.
First Chicago now is part of Bank One Corp. Neither Bank One nor First Chicago have been charged in the case. Thomas A. Kelly, a spokesperson for Bank One, said Tuesday that no investors lost money as a result of the incidents described in the SEC action. First Chicago bought the derivatives back from the funds and took an accounting charge of $7.2 million in November, 1994, Kelly said.
An attorney for Traba did not return a call seeking comment on the allegations. The SEC complaint said Traba worked for First Chicago until Oct., 1994. The SEC is seeking a variety of sanctions against Traba, including fines.
The Traba case is the second the SEC's Chicago office has brought this year alleging mis-pricing of derivatives. The earlier complaint, filed in July, was against Piper Capital Management and several top officials. The case is pending.
In the case announced last week, the SEC said Traba purchased so-called structured notes with a total face value of $50 million as of Oct., 1993. The value of the notes "fell substantially" after the Federal Reserve Board raised interest rates in early 1994, the SEC said.
From February to May, 1994, Traba ordered the funds' administrator to value the derivatives using a method based on the cost of the derivatives, the SEC said. The market value for the derivatives was "substantially lower" than the value set using costs, the SEC alleged.
After he was ordered to sell the derivatives out of the money market funds, Traba sold them at "materially inflated prices" into First Chicago trust accounts which he controlled, according to the SEC. The SEC characterized the moves as a "shell game" by which Traba transferred losses from the mutual funds to the trust accounts.