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Category: self-dealing

Fund Manager Barred for Misusing Soft Dollar Credits

The principal of a hedge fund manager was fined and barred from the industry, and his firm’s registration was revoked, for misusing soft dollar credits and cherry-picking trades. According to the SEC, the fund manager misused over $1.1 Million in soft dollar credits to pay such expenses as alimony to his ex-wife, inflated rent to an affiliated company, salary to an employee, and timeshare expenses. The SEC notes that such payments contradicted disclosures in the PPMs and the Form ADV. The SEC also charges the firm with engaging in an illicit cherry-picking scheme to enrich certain hedge fund clients over other clients.

We are seeing a renewed SEC interest in how firms use soft dollar credits. Although the facts of this case date back several years, this action may portend future regulatory and enforcement initiatives.

Direct Lending Platform Pays $5 Million to Settle Conflicts Charges

 

A direct lending platform agreed to pay a $4 Million fine and reimburse clients another $1 Million for allowing funds it managed to purchase loans in transactions that primarily benefited the parent company.  The SEC also barred and fined the firm’s CEO and fined the firm’s CFO.  The SEC asserts that the parent company used its controlling position on the Investment Policy Committee to force the funds to purchase loans outside its investment targets.  The SEC accuses the firm of using the buying funds as a liquidity source following the loss of two major institutional investors.  The SEC also maintains that the firm artificially inflated valuation and fund returns with undisclosed management adjustments.  The SEC did not charge the parent company because it self-reported and cooperated and engaged in significant remediation efforts including establishing a new independent governing board, outsourcing valuation, and retaining a third-party compliance consultant.

OUR TAKE: It is very difficult to cure the conflict of interest inherent in self-dealing transactions where an operating company depends on managed private funds for liquidity, and the funds source their assets only from the parent company.  This may be one of those conflicts that can’t be cured regardless of the disclosure.