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.

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