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BlueCrest Capital Management Limited agreed to pay $170 million to settle a complaint filed by the Securities and Exchange Commission (SEC) over its alleged inadequate disclosures.

According to the SEC, the charges against the UK-based investment adviser were connected to the transfer of its top traders from its flagship client fund, BlueCrest Capital International (BCI) to a proprietary fund, BSMA Limited. The investment adviser allegedly replaced the traders with an underperforming algorithm,

BlueCrest willfully violated the antifraud provisions of the Securities Act, and the Investment Advisers Act as well as the compliance rule of the Advisers Act.

The firm settled with the Commission without admitting or denying the charges against it.

The $170 million settlement included disgorgement and prejudgment interest of $132,714,506 and a penalty of $37,285,494. BlueCrest agreed to a cease-and-desist order imposing a censure. The Commission will distribute the $170 million to investors harmed by BlueCrest.

Allegations against BlueCrest

In its Order, the SEC found that BlueCrest created BSMA to trade the personal capital of its personnel using primary trading strategies that overlapped with BCI’s.  The investment advisers’ governing body owns a 93% interest in BSMA, which reached as much as $1.79 billion compared to its approximately $619 million ownership interest million in BCI.

The SEC accused the investment adviser of inadequate and misleading disclosures regarding BSMA’s existence, the movement of traders from BCI to BSMA, the use of the algorithm in BCI, and associated conflicts of interest.

BlueCrest allegedly moved most of its highest-performing traders from BCI to BSMA. It also allegedly assigned many of its most promising newly-hired traders, eligible to trade for either fund, to BSMA.

Additionally, the Commission claimed that BlueCrest failed to disclose that it reallocated the transferred traders’ capital allocations in BCI to a semi-systematic trading system.

The investment adviser failed to disclose certain material facts about the algorithm to BCI’s independent directors.  The algorithm generated significantly less profit with greater volatility than the live traders, BlueCrest obtained more of any performance fees generated by the algorithm than by live traders, according to the SEC.

In a statement, SEC Division of Enforcement Director Stephanie Avakian, said, “BlueCrest repeatedly failed to act in the best interests of its investors…” and the “settlement holds” the investment adviser “responsible for its conduct.”

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