Investment Management Firm: SEC Investigation


SEC Probe Threatens to Seriously Tarnish Successful Investment Firm

Our client was a rapidly growing investment management firm that managed billions of dollars for institutions. Over the years, the partners successfully built a reputation for spotting investment trends in certain categories of securities. As a result, one of the nation's largest financial companies had taken an ownership interest and desired to see the firm's winning streak continue.

Background and Situation Analysis

The investment firm learned that an inquiry was being launched by a foreign stock exchange into some suspicious trading involving one of its partners. At that point, the firm had too little information, much less an allegation, to know how to respond. However, that quickly changed when the authorities at the exchange referred the matter to the U.S. Securities & Exchange Commission. The SEC promptly launched an investigation, notifying the firm that one of the firm's partners was suspected of manipulating prices in certain stocks.

Initially, the partners were outraged at the suggestion that one of their colleagues had breached the firm's standards of ethics. Collegiality and pride fused into a resolve to defend the partner in question and fight any suggestion of impropriety in communications with clients, employees, the controlling shareholder, and the news media.

Nicolazzo & Associates was asked to assist the firm with communications defending the firm as well as the partner in the face of what were felt to be baseless allegations. Such allegations, even if proved wrong, had the potential to undermine investor confidence and trigger a sudden exodus of assets under management.

The Plan

Nicolazzo & Associates quickly determined that the firm had to investigate thoroughly the facts of the situation before saying anything substantive to the news media, clients, and employees. Crucial in devising the plan was an effective, close working relationship with the client's outside legal counsel and in-house general counsel. Nicolazzo & Associates advised the client to scrap a public statement placing the firm's wholehearted support behind the partner in question. Instead, together with legal counsel, we urged the client to place the accused partner on administrative leave during the course of the investigation. Nicolazzo & Associates prepared a holding statement that demonstrated that the company was taking the issue seriously and had not reached any conclusions as to the veracity of the allegations.

During the investigatory phase, our client's greatest risk was that investors would not wait for the outcome of the inquiry but would withdraw their assets in a sudden rush. Crucial to preventing this exodus of assets was ensuring that institutional customers learned about the investigation from the firm itself and not from the news media. Nicolazzo & Associates prepared an intensive client-outreach communications plan that divided clients into two groups: clients whose accounts weren't affected by the partner's trading activities and those whose accounts were impacted by the questionable trading. With messages tailored for each group, the client implemented N&A's crisis plan to assure clients of the safety of their investments, the integrity of the client, and the company's commitment to an independent inquiry into the matter. The communications included letters, phone calls, and personal visits to assuage client concerns.

An equally important objective was to avoid inflating the investigation into a bigger news story than it already was as a result of the investment firm's words and actions. Nicolazzo & Associates analyzed the SEC's past practices in its announcements, the newsworthiness of the alleged offense, and the awareness of the news media of the firm and the partner in question. We then devised a plan for containing coverage of the matter.


By the time the SEC finally resolved the matter with the client, the client had already implemented a significant portion of the plan Nicolazzo & Associates had prepared. When the SEC resolved the case, the public portion of the communications plan went into action. In the final analysis, the client had benefited greatly from effective, targeted communications:

  • During the time of the investigation, the client's assets under management actually grew by 50 percent, in some part due to the trust that the clients communications had engendered.
  • Only two clients withdrew assets, ostensibly due to the SEC investigation.
  • News accounts of the investigation, as well as its resolution, largely remained minor matters and were in the news only as one-day stories.
  • Damage was limited to the partner in question, who was forced to leave the securities industry.

The client's reputation of integrity was untarnished, thanks largely to its attitude of up-front communications and owning up to its responsibilities.