Kansas Adviser Ordered to Pay Over $8.5M After Breaching Fiduciary Duty

WHAT HAPPENED?

On Dec. 10, 2019, the Securities and Exchange Commission released information that an adviser, Kornitzer Capital Management, Inc. (KCM), and its principal, John Kornitzer, were charged with breaching their fiduciary duty to clients and failing to implement proper policies and procedures.

The trouble arose from Kornitzer’s decision to purchase high concentrations of securities from one company for four collective investment trusts which the KCM has held for over 30 years. The CITs were sponsored by a separate entity, Trust Company (TC), which over saw the trusts and Kornitzer’s portfolio management activities.

Beginning in 2011, Kornitzer began making significant investments in a company, referred to in Commission documents only as “Company A.” By the end of 2015, equity in Company A reached high concentrations, making up nearly 90% of the assets of one CIT. In the following months, the stock price of Company A dropped quickly, and the TC board of directors recognized the risk of continuing to employ this strategy.

TC notified KCM that it must devise a plan to lower the concentrations of Company A stocks to no more than 10% within the next year and a half. The TC also changed the firm’s policies and procedures to require the 10% limit across all issuers of debt and equity securities going forward.

Although KCM started the process of lowering concentrations in Company A securities, the CITs remained well in excess of the new 10% rule. As a result, TC began making repeated requests to review KCM’s plan to reduce Company A concentrations but received no response from KCM or Kornitzer.

Until mid-2018, TC made many documented requests to KCM and Kornitzer to properly amend the investment strategy. However, concentrations of Company A securities remained as high as 72% for one of the CITs. This was in breach of KCM’s fiduciary duty and violated Commission rules governing maintenance of proper policies and procedures.

In Aug. 2018, at the request of the TC board of directors, Kornitzer stepped down as the CITs’ portfolio manager. In the following months, replacement staff reduced Company A concentrations to comply with the 10% policy.

Upon investigation of Kornitzer and KCM’s actions, the Commission charged both with violating sections of the Advisers Act which make it illegal to commit fraud, and provisions regarding the adoption and implementation of written policies and procedures.

Kornitzer and KCM were ordered by Commission to cease and desist from continuing to violate the Advisers Act and to pay over $8.5 million in penalties and payments to victims who lost money as a result of the crimes.

WHAT DOES THIS MEAN FOR ME?

Kornitzer and KCM’s motive for maintaining high concentrations in Company A is unclear, but the acts were obviously defiant of TC’s instructions and the law. Had Kornitzer and KCM followed policies and procedures by reducing concentrations in Company A, action by the Commission and harm to investors could have been avoided.

Fairview is here to help your firm maintain compliance with the Advisers Act, in part, by facilitating the adoption and implementation of proper policies and procedures. Reach out to Fairview for assistance in this area and with questions about the Advisers Act.

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Fairview®
Founded in 2005 with the goal of developing streamlined solutions for investment advisers, Fairview® is now servicing investment advisers, foundations, and funds with over $200 billion in collective assets.