Macellum is known for pursuing an activist investing strategy, where it uses single-security investment pools to build large equity positions in public companies it believes are undervalued.

It then seeks to create value by effectuating management and board changes, either through negotiation or proxy contest.

That strategy brought Macellum considerable press attention in 2022 when it sought to make extensive changes at Kohl’s. However, shareholders ultimately rebelled against its intervention and Kohl’s did not see any significant increase in its valuation.

The SEC estimated that during that era, Macellum had between $100m and $400m assets under management. Now, its has about $125,000, and voluntarily withdrew its registered investment adviser status in March.

Outside investors

Macellum also relied on allies – known as outside entities – in its activist investment campaigns. These were typically better or well-capitalized unaffiliated investment advisers who invested their clients’ funds in parallel with Macellum.

They hoped that their combined effort would bolster their attempts to seize control of companies. In return for the strategy spearheaded by Macellum, these outside entities agreed to a fee ranging from approximately 10% up to 55% of their profits.

They further agreed to coordinate the purchase of company stock, as well as the exit of their respective positions. According to the SEC’s order, Macellum affiliates were paid $8,641,802 in fees as a direct result of these agreements with the unaffiliated entities.

A conflict of interest

The SEC stated that the hefty performance-based compensation issued to Macellum affiliates by the outside entities created a potential conflict of interest, because there were potential incentives to give priority to the interests of those outside entities over Macellum’s own fund clients.

The SEC also accused Macellum of neglecting to disclose to its clients the performance-related fees generated by the outside entities. The regulator also pointed out that sometimes its agreements between Macellum and the outside entities were never even fully executed – potential signs of lax governance and controls.

To settle the charges, Macellum has agreed to a fine of $75,000, a cease-and-desist order, and a censure.

Remediation

The SEC credited Macellum with full cooperation with the investigation, and for voluntarily implementing new written policies and procedures relating to its agreements.

These new policies require a review of potential conflicts of interest prior to execution of the agreements, as well as periodic back-testing of all existing consulting agreements including, interestingly, “a review of all related electronic communications.” 

Rule violations

For its failure to disclose potential conflicts of interest, Macellum was accused of violating Section 206(2) of the Advisers Act, which prohibits engaging in fraud and deceit upon a client.

For its failure to adopt policies to mitigate conflicts of interest in its dealings with clients, Macellum was accused of violating Rule 206(4)-7, requiring written policies and procedures to maintain compliance with relevant laws and regulations.