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.”
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.
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.
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.
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.