The principal of an adviser formed to manage private funds was barred from the industry and fined for misleading clients by touting a promised capital infusion. According to the SEC, the respondent recklessly believed that a third party would invest a large amount of capital, thereby allowing the fund to expand investment activities. Although the third party had executed a non-binding letter of intent, the transaction was never consummated. Nevertheless, the respondent continued to promise investors that it had hundreds of millions in committed capital. The SEC also charges the respondent with a series of related misrepresentations as well as lying on Form ADV and illegally registering with the SEC.
Don’t make promises based on a promise. It appears that the respondent genuinely believed the money was coming, but, unfortunately, the third party never legally committed. As the old saying goes, “If wishes were fishes, we’d all have a fry.”
The SEC fined and suspended the principal of a defunct investment adviser for falsely claiming SEC registration eligibility. The firm claimed that it had at least $25 Million in assets under management through 2011 and then suddenly claimed it had at least $100 Million assets under management following passage of the Dodd-Frank in 2012. The SEC asserts the firm had no basis for claiming SEC registration eligibility because it did not have the purported assets under management. The SEC also alleges violations of the custody rule arising from the firm’s role as a private fund manager.
OUR TAKE: Lying to the SEC about registration eligibility is more than mere marketing puffery. It can prompt a public enforcement action. Make sure you have records to support the claimed assets under management.
The SEC instituted enforcement proceedings against an adviser that it accuses of falsely claiming SEC registration eligibility. The SEC alleges that the adviser initially registered by claiming that it had over $500 Million in assets under management and a year later changed its ADV to claim eligibility as a mid-sized adviser ($25-$100 Million AUM) domiciled in New York and/or Wyoming. However, the SEC maintains that the adviser never had any clients or assets under management. The SEC further accuses the adviser of soliciting clients using the false ADVs.
OUR TAKE: SEC registration has become a qualifying criterion for larger clients who feel more secure with an SEC-regulated firm that has more than $100 Million in AUM. Consequently, firms may feel the pressure to stretch their numbers to qualify, which could result in a painful enforcement action. There is no shortcut to success.
A large foreign bank agreed to pay $90 Million and admit wrongdoing for overstating its private bank’s assets under management by prematurely re-classifying certain custody assets, thereby making misleading public filings. The private bank’s Chief Operating Officer was also censured and fined. According to the SEC, the COO pressured bankers to make an argument for re-classifying certain custody assets into its AUM calculation even where required triggers had not occurred. In several cases, the private bankers themselves indicated that the client had not promised or granted an investment mandate, although the firm hoped it would be considered. The re-classifications did not follow the firm’s publicly-disclosed policies and procedures.
OUR TAKE: Money management firms must resist the temptation to overstate assets under management, either in marketing materials or public filings. The SEC considers AUM to be a material fact upon which clients and investors rely.