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Day: March 14, 2016

Firm Failed to Disclose Deteriorating Financial Condition

The SEC has commenced enforcement proceedings against a fund manager and its principals for failing to disclose its deteriorating financial condition while continuing to raise funds from investors.  The SEC alleges that the PPM for the fund indicated that the firm would use investment proceeds to purchase receivables, but the firm used the proceeds primarily to repay prior investors and pay company expenses.  The SEC asserts the firm utilized an intercompany loan to hide its deteriorating financial condition.  Although the PPM included disclosure that the proceeds may be used to repay prior investors, the SEC accuses the respondents of deceiving investors because most of the proceeds were being used for that purpose.

OUR TAKE: The SEC believes that a deteriorating financial condition is a material condition that requires disclosure.   In fact, Item 18.B. of Form ADV explicitly requires disclosure of “any financial condition that is reasonably likely to impair your ability to meet contractual commitments to clients.”