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