Portfolio Managers Found Pocketing Funds for Utah Municipal Bonds, Slammed

Jack Humphrey, Regulatory journalist
January 07, 2011 /

More than $500,000 went to the pockets of two former portfolio managers of the Tax Free Fund for Utah (TFFU) from the mutual fund primarily intended for municipal bonds investment issued by the State of Utah and its county local authorities, the Securities and Exchange Commission found.

In a lawsuit filed by the SEC, Kimball L. Young of Salt Lake City and Thomas S. Albright of Louisville allegedly started charging issuers of the municipal bonds undisclosed “credit monitoring fees” in 2003 while still at the Aquila Investment Management LLC as investments advisers.

The “credit monitoring fees” purported to be compensations for Young and Albright, ranging from 0.5 to 1 percent of each bond’s par value, were based upon certain private placement and non-rated offers of municipal bonds that went hidden to the knowledge of Aquila and TFFU’s board of trustees, the SEC claimed, adding that the two portfolio managers insisted on the necessity of the fees as payments to their added services, the municipal bonds allegedly being non-rated.

The SEC contended that the fees were unjustifiable because all credit monitoring performed by Young and Albright for the municipal bonds was part of their regular tasks. The fees, totaling $520,626 from 2003 to April 2009, plus $256,071 for the year 2008, went directly to Young’s company despite documents stating that the fees would be paid to the TFFU.

Aquila management discovered the fraud only in April 2009, after which it tipped the SEC on the misconduct.

“Instead of acting in the fund’s best interests, they defrauded the fund by secretly taking fees that neither the fund nor its board knew about,” Co-Chief of the Asset Management Unit in the SEC’s Division of Enforcement Bruce Karpati said.

Young settled with SEC’s charges and agreed to pay $294,789 in disgorgement for the defrauded municipal bonds with prejudgment interest plus financial fines of $75,000, while Albright would be disgorged of ill-gotten profits amounting to $294,789 plus $50,000 penalty. The defrauded municipal bonds have also cost the two their profession of practicing any investment advisories with any firms.

 

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