The United States Securities and Exchange Commission (SEC) is facing a lawsuit filed by Wing Chau, president of Harding Advisory LLC, the money manager featured in the book entitled “The Big Short” written by Michael Lewis.
According to Reuters, Chau and firm, Harding Advisory LLC alleged that the SEC is violating his constitutional rights based on the process carried out by the regulator in pursuing its enforcement action against him.
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Chau and Harding Advisory LLC alleged that the SEC is “shoehorning” the case into an in-house administrative proceeding, a process wherein it would be more difficult for defendants to raise objections and obtain evidence after confronting similar cases in federal court.
The money manager argued in its complaint that the SEC is violating his Fifth Amendment rights to equal protection and due process by “effectively tying the plaintiffs’ hands behind their backs.” Chau and his firm added, “The decision to treat plaintiffs differently is causing and will cause severe prejudice.”
Chau and Harding Advisory LLC are requesting the federal court to permanently stop the administrative proceeding against it scheduled on March 31. The money manager filed its complaint against the SEC filed at the federal court in Manhattan.
SEC filed charges against Chau and Harding
In October of last year, the SEC filed charges against Chau and Harding Advisory LLC for defrauding investors in a collateralized debt obligation (CDO) transaction worth $1.5 billion. The regulator alleged HardingAdvisory LLC as collateral manager failed to reveal the role of hedge fund, Magnetar Capital LLC in choosing the collateral.
According to the SEC, Magnetar Capital owns a stake in the Octans 1 CDO, and hedged its stake with a short position. The hedge fund’s stake had a conflict of interest with the investors who wants the CDO to perform well. Harding Advisory LLC allowed itself to influenced by Magnetar Capital in selecting assets for Octans 1, which was disfavored by its own personnel. The Octans 1 failed by April 2008, which cost outside investors $1.1 billion while Harding Advisory earned approximately $4.5 million in fees for its role in the transaction.
SEC Administrative proceedings
The regulator was given the authority to seek penalties against defendants in an administrative proceedings under the 2010 Dodd-Frank Wall Street Reform and Protection Act. Judges under the payroll of the SEC supervise the administrative proceedings.
Some critics opined that the administrative proceedings might be unfair to defendants because the litigation is faster, discovery of evidence is limited, and defense lawyers are generally unable to take depositions.