The SEC charged an investment adviser with using his radio show and other advertisements to mislead investors. The adviser advertised that he had been selected to host the radio show, when, according to the SEC, he actually paid to host and broadcast the show. He also claimed to hold a fictitious “Qualified Retirement Advisor” designation. The SEC also accuses the adviser of intentionally concealing his significant disciplinary history by failing to deliver Form ADV and using internet search suppression consultants to hide his background. As alleged, the adviser also failed to disclose compensation arrangements and conflicts of interests. The principal, who also served as the firm’s Chief Compliance Officer, is also charged with operating a compliance program with insufficiently tailored policies that the firm failed to implement.
Now that the SEC has proposed a new investment adviser advertising rule, we expect that OCIE and Enforcement will step up review of how advisers comply. The new rule prohibits any misleading or unsubstantiated statements, which would include marketing hype not grounded in specific facts.
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 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.
An investment adviser has been censured, fined, and barred from the industry for making misleading marketing representations. The adviser used emails to claim inflated assets under management and tout a non-existent quantitative trading model and historical performance. The adviser furthered his fraud by putting the fake product and returns on a hedge fund database that was accessed by potential investors.
OUR TAKE: The SEC has warned that it would bring cases against advisers for misleading marketing claims. Firms should also note that the use of third party databases constitutes marketing subject to the Advisers Act’s anti-fraud rules.