CFTC secures conviction of portfolio manager in commodity pool fraud case
The Commodity Futures Trading Commission (CFTC) today announced that on April 15, a jury in the U.S. District Court in the Western District of Wisconsin issued a verdict finding Edward S. Walczak liable for engaging in conduct that operated as a fraud or deceit upon investors, potential investors, or investment advisors, in violation of Section 4o(1)(B) of the Commodity Exchange Act (CEA).
The verdict was obtained after a 5-day trial that was the culmination of an action brought by the CFTC against Walczak on January 27, 2020, that alleged he misrepresented how he managed risk in the Catalyst Hedged Futures Strategy Fund.
Catalyst and its agents made representations regarding risk management of the Catalyst Hedged Futures Strategy Fund that were materially misleading. Catalyst failed to implement or maintain adequate procedures to ensure that those acting on its behalf did not make misrepresentations to investors or investment advisors.
In the complaint filed against Walczak, the CFTC alleged that, from at least November 2014 to February 2017, Walczak led investors or investment advisors to believe that the fund was a safer investment than it actually was. Among other things, the complaint alleged that that Walczak falsely told investment advisors that he took specific steps to prevent the fund from losing more than 8 percent of its value.
The complaint alleged that Walczak routinely failed to hedge in the manner he said he did, ultimately resulting in at least $500,000,000 of investor losses.
The jury found Walczak not liable for violations of CEA Sections 4o(1)(A) and 6(c)(1) and CFTC Regulation 180.1. Further proceedings will follow regarding sanctions.
For the trial, the CFTC’s case was consolidated with a Securities and Exchange Commission (SEC) action against Walczak relating to the same conduct.