Value Line And Execs Settle Fraud Charges For Nearly $45 Million

New York City-based investment adviser Value Line Inc., its CEO Jean Buttner, its former Chief Compliance Officer David Henigson, and its affiliated broker-dealer, Value Line Securities, Inc. (“VLS”), agreed today to settle fraud charges brought by the Securities and Exchange Commission. The SEC contended that the defendants defrauded the Value Line family of mutual funds by charging over $24 million in bogus brokerage commissions on mutual fund trades funneled through VLS. 

"Value Line misappropriated millions of dollars from the mutual funds they managed by artificially allocating fund trades and then charging the funds for phantom brokerage services," said Robert Khuzami, Director of the SEC's Division of Enforcement. The SEC's order finds, among other things, that:
 
From 1986 to November 2004, Value Line, while serving as investment adviser to the Value Line funds, directed a portion of the funds' securities trades to VLS through its so-called "commission recapture program." Value Line arranged for one of three unaffiliated brokers to execute, clear and settle the Funds' trades at a discounted commission rate of $.02 to $.01 per share. Instead of passing this discount on to the funds, Value Line had the unaffiliated brokers bill the funds $.0488 per share and then "rebate" $.0288 to $.0388 per share to VLS. In total, VLS received over $24 million in bogus brokerage commissions from the funds pursuant to this scheme, as VLS did not perform any bona fide brokerage services for the funds on these trades.
 
According to the SEC’s order, Value Line falsely represented to the funds' Independent Directors/Trustees and shareholders that VLS provided bona fide brokerage services for the commissions it received and that VLS otherwise served the best interests of the funds and their shareholders.
 
The SEC contended that Buttner directed the "commission recapture program" and monitored its profitability to VLS, and thus to Value Line, by receiving periodic updates from Henigson, who was responsible for implementing the scheme. Buttner and Henigson were involved in structuring and negotiating the recapture arrangement with the unaffiliated rebate brokers. Through Buttner and Henigson, Value Line also made materially misleading statements and omissions about VLS and the recapture program to the funds and their shareholders in presentations to the Independent Directors/Trustees and in public filings with the Commission, according to the SEC.
 
The Commission's order requires that Value Line pay $24,168,979 in disgorgement, $9,536,786 in prejudgment interest, and a $10 million penalty; Buttner pay a $1 million penalty; and Henigson pay a $250,000 penalty.