SEC v. Edward S. Walczak — U.S. Securities and Exchange Commission Litigation Release No. 26179, dated November 22, 2024.
Former portfolio manager Edward S. Walczak was ordered to pay $11.2 million and prohibited from managing others' money for fraudulently misrepresenting risk management strategies to investors. He claimed safeguards limited losses to 8%, but no such safeguards existed, leading to a fund loss of over $700 million.
Imagine you hired a financial manager to watch your money. You asked them to promise that they would have special rules to stop your money from losing more than 8% of its value. But they didn't have those rules, and when the market got bumpy, your money lost a lot more than 8% – over $700 million in total! Now, a judge has ordered the manager to pay back a lot of money and banned them from managing anyone else's money.
Disclaimer: all facts are drawn from the SEC's own filings; the claims described are allegations unless and until a court rules or the parties settle, and some cases end in dismissal.
On November 19, 2024, the United States District Court for the Western District of Wisconsin entered a final judgment against Edward S. Walczak, a former mutual fund portfolio manager, for fraudulently misrepresenting to investors how he managed risk in the Catalyst Hedged Futures Strategy Fund. The Court ordered Walczak to pay $11.2 million and also restricted Walczak from managing or advising on investments for others. The order follows an April 18, 2022 jury verdict finding against Walczak on the SEC’s negligence-based fraud claims. 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. The complaint further alleged that, between December 2016 and February 2017, the Fund breached certain risk parameters and Walczak failed to take the required corrective action. The fund lost more than $700 million – approximately 20% of its value – as markets moved against it, according to the complaint. The jury found Walczak violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder, but also found he did not violate Section 17(a)(1) of the Securities Act and Section 206(1) of the Advisers Act. Based on the jury’s verdict, the Court ordered Walczak to pay $7,765,105 in disgorgement, $1,868,158.50 in prejudgment interest, and a $1,600,000 civil penalty, and enjoined Walczak from managing or advising on investments in securities or commodity futures for any third parties, except for his wife or children, until April 18, 2027. The SEC previously announced on January 27, 2020 a related settled action against the Fund’s investment adviser, Catalyst Capital Advisors LLC, and its President and Chief Executive Officer, Jerry Szilagyi. The SEC’s litigation was led by Michael Foster, along with Jake Schmidt and Kristine Rodriguez of the Chicago Regional Office, David Benson of the Denver Regional Office, and Keefe Bernstein of the Fort Worth Regional Office. The SEC acknowledges the assistance of the Commodity Futures Trading Commission.
Named in this action: Edward S. Walczak.