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Adviser Benefited When Clients Invested in Its Lender

An investment adviser and its principal agreed to pay over $1.3 Million in disgorgement, interest and penalties for misleading clients about the adviser’s relationship with a lender. Following the action, the adviser was sold to another adviser, and the principal was barred from the industry. According to the SEC, the adviser, through the principal, advised clients to invest in the lender’s promissory notes without telling them that the loan’s repayment terms depended on the amount invested. The adviser characterized its relationship with the lender as a “strategic affiliation.” The SEC also maintains that the principal misled a client into investing in the adviser for the purpose of acquiring other advisers but the client’s investment was instead used to pay the principal’s personal expenses. The scheme was uncovered following the SEC’s action against the lender for fraudulent securities sales.

Don’t engage in direct transactions with your clients. We do not believe any amount of disclosure could adequately mitigate such a significant conflict of interest and resulting breach of fiduciary duty.

Private Equity Manager Lowballed Purchase Offer to LPs

 The SEC censured and fined a private equity manager for lowballing the price offered to liquidate limited partnership interests.  The SEC asserts that the private equity manager, through its principal, offered to purchase remaining limited partnership interests at the December 2014 valuation.  The SEC faults the firm for failing to revise the price or fully disclose that it had received financial information indicating that the NAV had increased during the first quarter of 2015.  The SEC opines that the offer letter, termed “as an accommodation,” made it appear that the limited partners would receive full value for their interests.  The SEC charges violations of Rule 206(4)-8, the Advisers Act’s antifraud rule.

OUR TAKE: We generally advise against principal transactions with clients/investors/LPs.  Purchasing private interests directly from a client is so rife with conflicts that no amount of disclosure may be sufficient.