Mackensen & Company, Inc. (“MCI”) and Warren J. Mackensen have submitted an Offer of Settlement which was accepted by the Securities and Exchange Commission related to proceedings brought by or on behalf of the Commission. Mr. Mackensen and his family were the sole owners of MCI from 1998 – 2012. Mr. Mackensen was the President and, beginning in 2004, the CCO. The firm was sold in 2012; at which time he ceased to be the President, but he continued as CCO until 2014 and then ceased being an employee in 2015.
From late 2010 into 2012, MCI and Mackensen sent letters and attachments to trustees of trust funds held by New Hampshire’s municipalities presenting what purported to be actual historical performance for MCI’s model portfolios. The letters also claimed that each municipality could have earned more money by investing in MCI’s model portfolio than it had earned in its existing investments. The performance claimed in these advertisements did not represent actual past performance of any MCI model portfolio but rather was generated by back-testing MCI’s models based on their current holdings at the time each letter was sent. In reality, the model did not even exist throughout the entire time period claimed in the letters. It was not disclosed in the letter that the described performance was both hypothetical and back-tested. Many of the letters offered performance comparisons for periods that included dates during 2010 and early 2011, even though the MCI model portfolio was not assembled until May 2011. Some of the letters stated that the model portfolios “do not represent actual results of investing for your town or city,” but this sentence did not disclose that the portfolios did not actually exist. When Mackensen met with potential municipal clients he typically carried with him disclosures generated by the Morningstar software used to calculate his performance computations, but he did not provide those disclosures to the trustees who were his actual or potential client nor did he discuss with them how he calculated the purported additional gain. MCI received about 60 calls in response to the letters sent out which resulted in an additional 20 municipal clients for the firm.
Although Mackensen was the CCO, he admitted he was not familiar with the Commission’s rule relating to investment advertising. SEC Staff additionally noted that, from 2010 to May 2012, the firm failed to adopt and implement written policies and procedures designed to prevent employees from presenting performance information to clients or prospective clients in violation of the Advisers Act and its rules.
MCI must send each existing client a copy of Form ADV which incorporates the paragraphs providing a summary, description of the respondents, facts, violations and undertakings. The Form ADV must also specify that the entire Order will be posted on the homepage of MCI’s website. MCI must post a copy of the Order on the homepage of its website and maintain it on the homepage for six months. Both MCI and Mackensen are censured and, within 10 days, must begin paying a civil money penalty of $100,000 to the Commission with the final payment due March 30, 2016.
Before making an acquisition, firms must conduct a deep search in their due diligence efforts to make sure they are not buying a liability.
Acquisitions do not clear out pre-transaction regulatory liabilities, even if the former perpetrators are no longer employed with the firm!
This is also another reminder of the challenges faced with providing adequate disclosure related to presenting hypothetical or model performance. Great care should be taken when presenting back-tested performance which is regarded as highly suspect by the SEC.