WASHINGTON, Nov 26 (Reuters) - U.S. regulators filed civil fraud charges on Tuesday against a Detroit-based money market fund manager and the advisory firm where he works, saying they misled the fund's board about credit risks and exposures to the 2011 euro zone credit crisis.
The Securities and Exchange Commission's case, filed with the agency's administrative court, also alleges that Ambassador Capital Management and portfolio manager Derek Oglesby failed to comply with the cornerstone federal regulations that limit risk in a money market fund's portfolio.
An attorney for the two defendants could not be immediately reached.
Brian Jeffries, the chief executive of Ambassador Capital Management and Oglesby, its director of quantitative research, also could not be immediately reached.
The SEC said the case will be litigated before an SEC administrative law judge.
The SEC's case does not allege that shareholders suffered any losses.
Rather, the case hinges on "misconduct and compliance failures" in the operation of the Ambassador Money Market Fund, a fund series offered by Ambassador Funds.
The SEC has been stepping up its scrutiny of money market funds since 2008, after the Reserve Primary Fund "broke the buck" when its net asset value fell below $1 a share as panicked investors sought to pull their money out because of the fund's heavy exposure to Lehman Brothers.
In 2010, the SEC adopted a series of reforms to make money market funds more resilient to stress, improve their credit quality and improve transparency by requiring monthly reporting on their portfolio holdings.
Currently, the SEC is mulling a second round of reforms geared toward reducing the likelihood of runs by investors which could lead to drastic changes in how certain money funds' shares are priced.
Some of the charges against Ambassador relate to rules governing minimal credit risk violations that pre-dated the 2010 reforms.
However, the SEC also alleges that the firm and the portfolio manager failed to conduct proper stress testing, a requirement that was part of the 2010 reform package.
"Compliance with the risk-limiting provisions is critically important for a money market fund. Deviations can have serious consequences for pricing of fund shares and how the fund markets itself to investors," said Marshall Sprung, a co-chief of the SEC Enforcement Division's Asset Management Unit.
Tuesday's lawsuit against Ambassador Capital Management, which has about $1.1 billion in assets under management, stemmed from a review of money market fund data by the SEC's Investment Management Division.
In the course of the review, the SEC said staff noticed that the performance of the Ambassador Money Market Fund, which was managed by Oglesby, was "consistently different" from the rest of the market.
Money market funds are generally considered to be very safe, liquid investments.
SEC rules allow them to maintain a stable $1 per share net asset value by investing in safe and low-risk securities.
A fund's board of trustees must also determine that the investments have a minimal credit risk.
The SEC alleges that Ambassador Capital Management and Oglesby withheld critical pieces of information from the board, including the fact that the fund regularly bought securities with greater credit risks and that it was buying Italian securities during the Eurozone credit crisis.
In 2011, for instance, the SEC said that the fund owned securities issued by the French-Belgium bank Dexia SA even though it had been bailed out by France, Luxembourg and Belgium.
In violating these rules, the SEC said that the Ambassador Money Market Fund should not have been putting itself out to investors as a money market fund at all.
From time to time, the SEC said that more than half of the shareholders' investments came from just two municipalities - Washtenaw County, Michigan and the City of Detroit, which earlier this year filed for the largest bankruptcy in history.
Although their capital was at risk, the SEC's case does not suggest that shareholders suffered any losses and the fund never broke the buck.
The Ambassador Money Market Fund operated from 2000 until June 2012, when it was liquidated.