## Facts

- EGM Capital, Inc. (EGM) was an SEC-registered investment adviser; Michael T. Jackson was EGM’s founder and, during the relevant period, its chairman, chief executive officer, and majority shareholder.
- In late 2000, EGM portfolio managers decided to sell all 122,000 shares of Ivax Corporation stock held for EGM client accounts, and EGM’s senior trader executed the sale.
- Several days later, a second EGM trader mistakenly sold an additional 100,000 Ivax shares for those same client accounts, even though the accounts did not hold that stock, creating an unintended 100,000-share short position.
- After EGM discovered the trading error, it covered the short position by purchasing 100,000 Ivax shares; because Ivax’s price had risen since the mistaken short sale, the cover transaction produced a loss of roughly $400,000.
- Jackson directed that the loss be allocated to EGM clients, even though the loss resulted from EGM’s own trading mistake.
- Jackson and EGM attempted to conceal the error by making the transactions appear to reflect an intentional client short-sale strategy rather than an operational mistake.
- The SEC instituted administrative and cease-and-desist proceedings under Investment Advisers Act §§ 203(f) and 203(k). The matter was resolved by a settled SEC order; respondents consented without admitting or denying the SEC’s findings (except as to jurisdiction).

## Issues

1. Whether an investment adviser violates Advisers Act §§ 206(1) and 206(2) by causing clients to bear losses from the adviser’s trading error and attempting to conceal or mischaracterize the error.
2. Whether Jackson, as EGM’s CEO and chairman, willfully aided and abetted and caused EGM’s violations of Advisers Act §§ 206(1) and 206(2).

## Decision

- The SEC found that EGM willfully violated Advisers Act §§ 206(1) and 206(2) by making clients bear the loss from EGM’s trading error.
- The SEC found that Jackson willfully aided and abetted and was a cause of EGM’s violations of Advisers Act §§ 206(1) and 206(2).
- The SEC ordered EGM and Jackson to cease and desist from committing or causing future violations of Advisers Act §§ 206(1) and 206(2).
- The SEC imposed remedial sanctions and monetary relief as set out in the order (including civil penalties and related remedies).

## Legal Principles

- Investment advisers owe clients fiduciary duties of loyalty and care and may not place the adviser’s financial interests ahead of clients’ interests in handling operational or trading mistakes.
- Advisers Act § 206(1) prohibits using any device, scheme, or artifice to defraud clients; shifting an adviser-caused trading-error loss to client accounts, especially when paired with concealment, can satisfy this standard.
- Advisers Act § 206(2) prohibits engaging in any transaction, practice, or course of business that operates as a fraud or deceit on clients; allocating an adviser’s own mistake-driven losses to clients through misleading booking or omissions violates this provision.
- Attempts to disguise a trading error as intentional client trading are deceptive acts that support antifraud liability under §§ 206(1) and 206(2).
- An executive who directs or meaningfully participates in the improper loss allocation or concealment may be liable for willfully aiding and abetting, and causing, the adviser’s primary violations in an SEC administrative proceeding.

## Conclusion

In a settled administrative order, the SEC found that EGM and its CEO-chairman Michael T. Jackson violated the Advisers Act’s antifraud provisions when, after an erroneous Ivax short sale and a roughly $400,000 cover loss, Jackson directed that the loss be placed on hedge fund client accounts and EGM attempted to make the activity appear intentional; the SEC entered a cease-and-desist order and imposed sanctions and monetary remedies.


In the Matter of Michael T. Jackson, Investment Advisers Act Release No. 2374 (2005)