The SEC filed an enforcement order against Donald L. Koch and Koch Asset Management LLC (KAM) on April 25 for an alleged "mark-the-close" investment scheme, which the SEC says constituted a breach of fiduciary duty. According to the SEC, St. Louis-based KAM and Donald L. Koch, the firm's founder and president, engaged in a "mark-the-close" investment scheme from September 2006 through December 2009, which affected the firm's approximately 40 advisory clients.
"Marking-the-close" is a trading practice used to artificially inflate the price of a security by making it appear to be worth more than it actually is. Traders purchase the security at the very end of the trading day at a significantly higher price than the current price. Then, the end-of-day report shows a much higher closing price than would have the case otherwise.
The SEC alleges that KAM, through Koch, instructed registered broker-dealer Huntleigh Securities Corporation to execute marking-the-close transactions on certain securities, particularly High Country Bancorp and Carver Bancorp, for the express purpose of inflating the reported performance of client accounts.
Performance reports given to clients were based on the portfolios' changes in value as of the last trading day of the month.
The SEC further alleges that while KAM has about 40 advisory clients, the same investment strategy is used in all of the accounts and many of those accounts hold the same, or similar, securities.
"By marking-the-close in a security held by many of its advisory accounts, [KAM] was able to artificially improve the reported monthly performance for each account holding that security," said the SEC in its filing.
While the "mark-the-close" transactions allowed KAM (Koch Asset Management) to report better performance on most client accounts, one client - a 92-year-old retired homemaker - paid the price.
According to the SEC's allegations, all of the High Country Bancorp shares were allocated to one client, resulting in a 35 percent increase in the account's holding of the shares. On September 30, 2009, a "mark-the-close" transaction made the 92-year-old investor overpay for the shares.
"KAM and Koch, by placing orders to purchase securities for their advisory clients at artificially inflated prices, breached their fiduciary duty to seek best execution for their clients," said the SEC.
According to anApril 26 article by Chris Kentouris, the SEC decided not to fine Huntleigh Securitites for its actions, but did order the firm to adopt new procedures to prevent and detect "mark-the-close" transactions. Actions were taken against Jeffrey Christanell, the former head of equity trading at Huntleigh Securities, who agreed to be fined $15,000 and to be barred from the securities industry for one year.