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Adviser Recklessly Promised Investors that Third Party Capital was Coming

 

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.”

Exempt Reporting Adviser Barred and Fined Over $1.1 Million

The principal of an exempt reporting adviser was barred from the industry and agreed to pay over $1.1 Million in disgorgement and penalties for conflicted transactions and misrepresentations.  The SEC charges that the respondent caused a fund he managed to purchase a portfolio company from an affiliated fund in violation of the purchasing fund’s debt and concentration limits.  The SEC asserts that the respondent intentionally misled investors by undervaluing the portfolio company in financial statements and disclosure documents.  The SEC also claims that the respondent misled investors about underlying investments and charging undisclosed monitoring fees.  The SEC also fined the firm’s CFO/CCO.  The SEC cites violations of the anti-fraud rules under the Advisers Act (206(4)-8), the Securities Act (17(a)(1) and 17(a)(3)), and the Exchange Act (10b-5).

An exempt reporting adviser is still subject to several provisions of the Advisers Act, including its fiduciary and anti-fraud rules.  We recommend that ERAs implement a legitimate compliance program to avoid a firm-ending regulatory action like this one.

Adviser Faces Industry Death Penalty and Criminal Prosecution for Ignoring Custody Rule

An adviser agreed to shutter the firm and close its private fund and pay over $1.1 Million in disgorgement and interest for lying to clients about the safety of their assets.  The firm’s principal has also been barred from the industry and faces criminal prosecution.  According to the SEC, the firm violated the custody rule (206(4)-2) by failing to deliver audited fund financial statements and then lying to clients about the fund’s assets and pendency of the audit.  The SEC alleges that the respondents misappropriated client assets for personal and firm expenses and lied to clients with false account statements, tax documents and Form ADV.  The SEC also charges the respondents with securities fraud.

It is a HUGE warning sign when a fund manager fails to deliver audited financial statements, regardless of the ostensible reasons for delay.  What may be most shocking is that this firm engaged in unlawful conduct for at least 11 years until the SEC uncovered wrongdoing during a routine OCIE exam in 2018. 

SEC Alleges Short Seller Disseminated False Negative Information

 

The SEC has commenced enforcement proceedings against a hedge fund manager for taking short positions in a public company and then engaging in a negative and public relations campaign to drive down the company’s stock price.  The hedge fund manager used interviews, social media and published research reports to make false claims about the company’s product and financial situation.  According to the SEC, the false negative information had the intended effect of lowering the company’s stock price, which fell 34% during his negative campaign.  The SEC charges violations of the anti-fraud rules.

OUR TAKE:  We suspect that many public companies are cheering this action because the SEC seeks to chill a short seller from disseminating negative information for financial gain.  In this case, the SEC maintains that the hedge fund made false factual statements.  This type of case will not help prevent negative opinions based on accurate facts.

Fund Manager Created On-Line Aliases and Marketed False Performance

The SEC barred a private fund manager and ordered him to pay nearly $3 Million in disgorgement for creating fake identities and performance track record.  The SEC alleges that the respondent created on-line doppelgangers and hired an internet-based search engine manipulator to fabricate search results to make it appear that his firm was managed by several legitimate investment management professionals.  Instead, the respondent, who had a criminal background, was the sole owner/operator.  The SEC also accused the fund manager of supplying Morningstar with false performance data and history so that the fund could secure a 5-star rating.  In addition to the SEC penalties, the fund manager is serving a 60-month prison sentence.

OUR TAKE: If you are an investor or an adviser that recommends third party managers, you need to conduct significant due diligence, which necessarily goes beyond a web search and a Morningstar rating.  As this case shows, a fraudster can manipulate internet results and fool databases.

https://www.sec.gov/litigation/admin/2018/33-10461.pdf

Court Enters Judgment against Fund Adviser for Resume Inflation

The United States District Court for the District of Colorado entered a default judgment against a state-registered fund manager for misrepresenting his experience and credentials, among other false statements.  As part of his fund-raising efforts, the fund manager claimed to have extensive portfolio management experience including successful management of several large private funds.  The SEC alleges that, although the defendant worked for the organizations referenced, he never served as a portfolio manager and generally acted in minor consulting roles unrelated to portfolio management.  Additionally, the SEC charges that the defendant made unsubstantiated performance claims.

OUR TAKE: When you engage in resume inflation to raise money, you have engaged in securities fraud.  You also run the risk of a criminal prosecution under 10b-5.