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SEC Charges Portfolio Managers with Defrauding Muncipal Bond Fund

Last week, the SEC announced charges against two former portfolio managers at Aquila Investment Management LLC, Kimball L. Young of Salt Lake City and Thomas S. Albright of Louisville.  The SEC alleges that, while employed by Aquila to manage the Tax Free Fund for Utah, the two men improperly charged municipal bond issuers more than a half-million dollars in undisclosed "credit monitoring fees," keeping the fees for themselves.

. . . Young and Albright began charging municipal bond issuers "credit monitoring fees" in 2003 on certain private placement and non-rated bond offerings without informing Aquila management or the TFFU's board of trustees. The fees, which ranged between 0.5 and 1 percent of each bond's par value, were a one-time fee purportedly to compensate Young and Albright for performing additional ongoing credit monitoring that they contend was required because the bonds were not rated.

In fact, any credit monitoring work that Young and Albright performed was already part of their regular job responsibilities. Although deal documents indicated that the fees were required by and would be paid to the TFFU, the fees were instead wired to a company controlled by Young, who shared them equally with Albright. The fees totaled $520,626 from 2003 to April 2009, including $256,071 for the year 2008 alone.

According to the SEC, Young and Albright charged and collected the fees without the knowledge of the fund's board of directors or the fund's management:

"Young and Albright violated the most basic duties that investment advisers owe the mutual funds they serve - to act in the best interests of the fund and disclose any conflicts of interest they face," said Bruce Karpati, Co-Chief of the Asset Management Unit in the SEC's Division of Enforcement. "Instead of acting in the fund's best interests, they defrauded the fund by secretly taking fees that neither the fund nor its board knew about."

This case was investigated by the SEC's newly formed Asset Management Unit in its Division of Enforcement.  

The full text of the SEC's announcement, including links to the orders against Young and Albright, is available at:  http://www.sec.gov/news/press/2011/2011-5.htm