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Day: May 2, 2014

SEC Sues Adviser Principal for Failing to Conduct Due Diligence

The SEC has commenced securities fraud proceedings against an RIA’s principal for failing to conduct the promised due diligence on an investment that turned out to be a Ponzi scheme.  The SEC states that the PPM and the LPA for the subject fund included disclosure about the significant due diligence performed by the adviser and the information available to the adviser.  However, the SEC alleges, that the adviser did not conduct the due diligence or obtain the information.  Although the adviser repeatedly failed in his attempts to obtain information and conduct due diligence, he continued to solicit investors for the fund.  The SEC cites emails where the defendant expresses his frustration with the fund sponsor and the underlying investment.  The SEC states that the defendant had a duty to disclose the material misstatements and omissions in the PPM “in connection with the positive statements regarding that investment and recommendation” that clients invest in the fund.
OUR TAKE: What are the due diligence of obligations of a registered investment adviser?  It is not entirely clear.  However, an adviser must at least conduct the due diligence that it says it will do. Also, an adviser should avoid making any positive statements about a fund investment lest the adviser be held accountable for all statements made in the PPM.