Edward Walczak found liable for deceit in Catalyst’s risk management case

Rick Steves

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 U.S. District Court in the Western District of Wisconsin issued a verdict finding Edward S. Walczak liable for deceiving investors, potential investors, or investment advisors in a commodity pool fraud case charged by the CFTC.

CFTC Acting Director of Enforcement Vincent McGonagle, said: “True and accurate disclosures are critical to investor protection. As we said at the outset of this case, the CFTC is committed to holding accountable individuals that misstate the risks of investing in their products.”

Following a 5-day trial that was the culmination of an action brought by the CFTC against Walczak on January 27, 2020, the jury found that the portfolio manager was liable for making false or misleading statements. The CFTC alleged he misrepresented how he managed risk in the Catalyst Hedged Futures Strategy Fund.

Catalyst and CEO Szilagyi paid $10.5m

In February, the same court granted in part the SEC’s motion for summary judgment against Edward S. Walczak for misrepresenting to investors how he would manage risk in the Catalyst Hedged Futures Strategy Fund.

The court ruled that the SEC was entitled to summary judgment on certain of its negligence-based fraud claims against Walczak.

The court found that Walczak repeatedly told investors that he used modeling software to stress test the Fund’s portfolio on a daily basis, when, in fact, Walczak did not use the software on a daily basis.

The court further held that Walczak’s misstatements that he stressed the portfolio daily were material given that risk management was of considerable concern to potential investors and investment advisers and that the Fund’s strategy subjected it to possible dramatic swings in value.

The court reserved judgment for the jury whether Walczak acted with scienter with respect to these misstatements and whether Walczak should be liable for other alleged misstatements concerning his management to an 8% drawdown limit on the Fund’s value.

In 2020, the SEC settled charges with Catalyst Capital Advisors LLC (CCA) and its President and Chief Executive Officer, Jerry Szilagyi, for misleading investors about the management of risk in a mutual fund. The defendants agreed to pay a combined $10.5 million to settle the charges.
According to the regulator, although CCA told investors that it abided by a strict set of risk parameters for the Catalyst Hedged Futures Strategy Fund, the firm 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 alleged 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.

Read this next

Digital Assets

FTX Japan has until March to return customer assets

The Kanto finance bureau of Japan’s Ministry of Finance (MoF) said it will extend its business suspension order for FTX Japan, the Japanese arm of the beleaguered crypto exchange FTX.com.

Executive Moves

Johan Wiese replaces Richard as director of IG South Africa

IG Group, Europe’s largest online trading platform, has relocated its Finance Chief Operating Officer (COO) Johan Wiese to join its South Africa business as a director.

Digital Assets

Nexo continues European expansion with Polish licence

Crypto lender Nexo said today that it had been registered as a virtual currency operator with the Ministry of Finance in Poland, which enables its European-based entity to provide services to the country’s residents lawfully.

Digital Assets

Wirex expands crypto lineup to 130 tokens

Payment and crypto wallet provider Wirex has listed 52 new tokens on their app, bringing the total number of supported digital assets to 130, alongside 13 fiat currencies.

Executive Moves

Capital.com lures IG’s long-serving exec Greg Adams

Multi-licensed online brokerage group Capital.com has appointed Greg Adams, who spent the bulk of his two-decade career at IG Group, as its newest head of risk.

Digital Assets

Farcana and Dravus join forces to line up sustainable mining power sources

As a result of growing ecological awareness, the sector’s top companies have been working to achieve effective cryptocurrency mining while still being energy-efficient: e.g. using mining facilities fueled by renewable power and located in colder regions to lower heat-dissipation costs.

Retail FX

Vantage to expand swap-free trading offering after savings of $1 million in gold XAUUSD

The swap-free product enhancement was designed to provide greater convenience for gold XAUUSD traders. Clients are not charged overnight fees when trading across all trading accounts, including on the Vantage App, regardless of trade size.

Digital Assets

Bosonic launches Cross Custodian Net Settlement to further eliminate settlement risk

Bosonic has announced the go-live of Cross Custodian Net Settlement (CCNS) in which trades in USDC and ETH were executed, cleared, and settled atomically between two digital asset custodians, First Digital in Hong Kong and Propine in Singapore.

Industry News

IntraFi taps Broadridge to offer loans to costumers of brokers, advisors, and RIAs

“Broadridge’s partnership with IntraFi expands the availability of securities-based lending to previously underserved parts of the market — community and regional banks, independent broker-dealers, and unaffiliated advisors and RIAs.”