The SEC announced on Tuesday that it has charged BlackRock, one of the world’s largest investment management firms, for misleading investors by inaccurately describing its investments in the entertainment sector.

The agency found that BlackRock failed to disclose certain risks associated with its investments, leading investors to make decisions based on incomplete information. As part of a settlement agreement, the financial behemoth has agreed to pay a penalty of $2.5m to resolve the charges.

Inaccurate filings

In its press release, the SEC explained the investments were part of BlackRock Multi-Sector Income Trust (BIT), a publicly traded fund advised by the giant. From 2015 to 2019, BIT had made substantial investments in Aviron Group, LLC, a firm focused on developing print and advertising plans for one to two films per year. BlackRock’s public documents filed with the SEC inaccurately represented Aviron as a “Diversified Financial Services” company, and the inaccuracies appeared in multiple annual and semi-annual reports publicly available to investors.

The SEC’s order states that Aviron was neither diversified nor a financial services firm; instead, it was in the business of developing print and advertising plans for one or two films a year and funding these distribution expenses in exchange for an agreed-upon rate of return from the proceeds of the films.

“Accurate disclosures of a closed-end or mutual fund’s portfolio are crucial for retail and institutional investors to evaluate their investment decisions.”

Andrew Dean, Co-Chief of the SEC’s Enforcement Division

The SEC also found that BlackRock had overstated the interest rate that Aviron was paying, further misguiding investors.

BlackRock corrected these errors in 2019, revising its reports to describe Aviron’s industry and interest rate accurately.

“Accurate disclosures of a closed-end or mutual fund’s portfolio are crucial for retail and institutional investors to evaluate their investment decisions,” stated Andrew Dean, Co-Chief of the SEC’s Enforcement Division’s Asset Management Unit. He emphasized that investment advisers should provide this vital information, noting that BlackRock failed to do so regarding the Aviron investment.

The SEC cited BlackRock’s violations of Sections 203(e) and 203(k) of the Advisers Act, and Sections 9(b) and 9(f) of the Investment Company Act in its order. BlackRock agreed to the order, and, along with the monetary penalty, it agreed to a cease-and-desist order and censure without admitting or denying the SEC’s findings.

Charges against Aviron founder

Back in May 2020, the SEC charged William Sadleir, the founder of Aviron, accusing him of misappropriating BIT funds invested in his company. According to the agency, he defrauded BlackRock Multi-Sector Income Trust, the principal investor of Aviron, of at least $13.8m from the $75m investment and proceeded to misuse the embezzled funds for personal and business expenses.

In a parallel action, the US Attorney’s Office for the Southern District of New York filed criminal charges against Sadleir, sentencing him in September 2022.