We wrote last Wednesday about the SEC bringing fraud charges against the now-defunct Ambassador Money Market Fund, its first action involving money market funds since Reserve Primary Fund (see Crane Data's Nov. 27 News, "SEC Charges Ambassador Money Mkt Fund Portfolio Manager With Fraud), and excerpted from the SEC's press release "SEC Announces Fraud Charges Against Detroit-Based Money Market Fund Manager". Today, we excerpt from the full "cease-and-desist" order and examine the issue in more detail. It says, "The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Sections 203(e), 203(f), and 203(k) of the Investment Advisers Act of 1940 ("Advisers Act"), and Sections 9(b) and 9(f) of the Investment Company Act of 1940 ("Investment Company Act") against Ambassador Capital Management, LLC and Derek H. Oglesby (collectively "Respondents")."

The order explains, "After an investigation, the Division of Enforcement alleges that: 1. This case involves misconduct and compliance failures in the operation of Ambassador Money Market Fund (AMMF), a money market fund series offered by Ambassador Funds (Ambassador Funds) and managed by Ambassador Capital Management (ACM). ACM and Derek Oglesby, the portfolio manager principally responsible for AMMF, violated the federal securities laws by repeatedly making false statements to AMMF's Board of Trustees regarding the level of risk in AMMF's portfolio, including statements regarding maturity restrictions, exposure to European issuers, and diversification."

It continues, "In addition, ACM and Oglesby caused AMMF's failure to comply with Rule 2a-7 of the Investment Company Act of 1940, which limits the amount of risk that money market fund portfolios can have. Specifically, ACM and Oglesby caused AMMF's failure to comply with Rule 2a-7's risk limitations by purchasing securities posing more than a "minimal credit risk" under ACM's own guidelines, as well as securities which violated Rule 2a-7's conditions on issuer diversification, and by failing to subject AMMF's portfolio to appropriate stress testing. As a result, AMMF was not authorized to use the amortized cost method of valuing securities (under which it priced its securities at $1 a share) and hold itself out as a money market fund under the Investment Company Act."

The SEC states, "Finally, ACM caused Ambassador Funds' failure to implement adequate written compliance policies under Rule 38a-1 of the Investment Company Act. ACM failed to follow Ambassador Funds' compliance procedures regarding the minimal credit risk determination for securities purchased for AMMF's portfolio. Accordingly, ACM caused Ambassador Funds to violate Rule 38a-1."

The order tells us about the company, "Ambassador Capital Management, LLC is a Michigan limited liability company with its principal place of business in Detroit, Michigan. ACM has been registered with the Commission as an investment adviser since 1998. ACM's advisory clients include governmental entities, pension and profit sharing plans and charities. According to its latest Form ADV, ACM has approximately $1.1 billion in assets under management in 25 accounts. ACM generates income for its clients primarily by investing in fixed-income securities."

It continues, "Derek H. Oglesby, age 36, is a resident of Bloomfield Hills, Michigan. He is a portfolio manager at ACM and a chartered financial analyst. Oglesby was responsible for managing AMMF's portfolio and its day-to-day operations from 2009 until its liquidation in June 2012. Oglesby currently works as Director of Quantitative Research at ACM and is responsible for managing the shorter-term and longer-term portfolios for ACM."

The SEC explains, "Ambassador Money Market Fund (AMMF or "the Fund") was Ambassador Funds' prime money market fund series which operated from 2000 until its liquidation in June 2012. Ambassador Funds is a Delaware business trust with its principal place of business in Detroit, Michigan. Ambassador Funds is an open-end diversified management investment company registered with the Commission since 2000."

The complaint also says, "As of October 2011, AMMF consistently had generated a return which significantly exceeded that for the prime money market funds in its peer group. In addition, AMMF also owned securities issued by Dexia, SA, a French-Belgian bank, after it was taken into receivership by France, Luxembourg and Belgium on October 10, 2011. Further, AMMF held the asset backed commercial paper of a troubled German bank and two Italian issuers. Given these concerns, in November 2011, the Commission conducted a compliance examination of AMMF. During that examination, the Wall Street Journal reported that Moody's issued negative ratings actions on 12 German banks, two of which sponsored asset backed commercial paper held by AMMF. However, ACM's chief investment officer was unaware of these downgrades."

It adds, "ACM has been the investment adviser to Ambassador Funds since 2000. AMMF was Ambassador Funds' money market fund from 2000 until its liquidation on June 30, 2012. Between January 1, 2009 and June 30, 2012, Ambassador Funds made numerous filings with the Commission, on behalf of AMMF, which identified AMMF as a money market fund.... AMMF's total net assets fluctuated significantly during the last several years of its operations. Between 2010 and 2012, the total dollar value of AMMF ranged from a low of $130.9 million to a high of $388 million.... Ambassador Funds paid ACM a management fee of .2% based on the average net daily assets of the Fund. ACM agreed to waive the Fund's expenses, to the extent required, so that the Fund's 1-day yield did not fall below .02%."

Finally, the SEC order states, "AMMF was designed to appeal to Michigan municipalities. In compliance with Michigan law, AMMF was permitted to invest in, among other things, U.S. Treasury instruments, certificates of deposit and asset-backed commercial paper. AMMF generally invested in asset-backed commercial paper. However, after the financial crisis of 2008, the supply of asset-backed commercial paper decreased, which limited the number of investment options available to AMMF. As a result, AMMF's portfolio generally consisted of between 15-25 different holdings. From time to time, more than half of the shareholders' investments in AMMF came from just two municipalities, the City of Detroit and Washtenaw County, Michigan. These municipalities invested in AMMF in order to manage cash in connection with municipal bond offerings and general operations, and in pursuit of liquidity and security.... IT IS ORDERED that a public hearing for the purpose of taking evidence on the questions set forth in Section III hereof shall be convened not earlier than 30 days and not later than 60 days from service of this Order at a time and place to be fixed, and before an Administrative Law Judge to be designated by further order as provided by Rule 110 of the Commission's Rules of Practice, 17 C.F.R. S201.110."

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