BlackRock will pay $2.5 million in penalties to settle charges with the Securities and Exchange Commission that it failed to properly describe investments in one of the asset manager’s publicly traded fixed income closed-end funds.
The regulator claims that the BlackRock Multi-Sector Income Trust (BIT), which made “significant investments” in Aviron Group, inaccurately described it as a “diversified financial services” company. It was invested through a lending facility.
“Instead, [Aviron] was in the business of developing print and advertising plans for one to two films a year and funding these distribution expenses in exchange for an agreed-upon rate of return from the proceeds of the films,” the SEC order read.
The activity occurred between 2015 and 2019, the SEC claims, during which BIT invested in four of the six films Aviron offered. BlackRock signed several agreements with Aviron to provide millions in funding for the movies, and at its peak in October 2017, the company represented nearly 10% of the fund’s reported net asset value.
In addition to inaccurately describing the investment, the SEC also claims BlackRock described the coupon rate associated with the Aviron investment as having a floating rate component in addition to the agreed fixed rate, when there was no floating rate component. Those errors overstated the amount of potential income the investment could contribute to the fund in certain periods, the SEC order says.
BlackRock identified the inaccuracies in 2019 and corrected their disclosures. But Aviron started to collapse. At the end of 2019, BlackRock filed suit against Aviron, accusing the company and owner William Sadleir of forgery and fraud, according to Deadline. Sadleir was soon ousted from the company.
In 2022, a New York federal court sentenced Sadleir to six years in prison for the BlackRock scheme, in which he defrauded the fund of over $30 million, according to The Hollywood Reporter. He was ordered to pay $31.6 million in restitution.
“We are pleased to fully resolve the SEC’s investigation of this matter,” said a BlackRock spokesperson, in a statement. “BlackRock discovered these inadvertent reporting errors in connection with an internal review it undertook after uncovering a fraud perpetrated by Aviron and its principal against the BlackRock Multi-Sector Income Trust (BIT). As soon as BlackRock discovered the reporting errors, we acted promptly to correct them and enhance our procedures to prevent a reoccurrence.”
“Retail and institutional investors rely on accurate disclosures of the companies that make up a closed-end or mutual fund’s portfolio to evaluate a current or prospective investment in the fund,” said Andrew Dean, co-chief of the SEC enforcement division’s asset management unit, in a statement. “Investment advisors have a responsibility to provide this vital information, and BlackRock failed to do so with the Aviron investment.”