False Statements and Conflicts of Interest | Firm and Co-Founder Charged
SEC RELEASES
Introduction
On May 29th, the SEC announced charges against a previous RIA and its Co-Founder for statements made to investors and undisclosed conflicts of interest.
The Firm paid a civil penalty of $350,000 and the Co-Founder paid $250,000 and accepted a 12-month suspension, to settle the charges.
This charge highlights the importance of “complete and accurate reporting at all turns” according to the Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, Osman Nawaz.
What Happened?
- From at least February 2020 through August 2022, the Firm made materially false and misleading statements about Fund holdings and exposures in investment communications.
- Some misleading statements were caused by modifications made by the Co-Founder of the company to data about holdings and exposures, modifications that were not reviewed by compliance employees.
- From at least September 2022 through February 2023, the Firm’s other Co-Founder operated a separate Hedge Fund in China that presented a conflict of interest and did not disclose this to its investors.
- The Firm lacked proper policies and procedures reasonably designed to prevent false and misleading statements in investor communications.
- Since at least September 2022, the other Co-Founder of the Firm was trading capital in his own Fund that operated in markets that overlapped with the Firm’s Fund.
- As the Head of Research for the Firm, the other Co-Founder would have had to divert time away from the Firm’s Fund towards this undisclosed Fund.
- The charged Co-Founder and CEO were aware of seed investors that redeemed a portion of their investment in the Firm’s Fund to invest in the Undisclosed Fund.
- None of these conflicts of interest was disclosed to the Firm’s investors.
Vigilant’s Conclusion
It is vital that Firms establish and implement policies and procedures that are reasonably designed to prevent violations of the Advisers Act. In this situation, it is reported that actions and communications by Senior Executives were not reviewed by compliance staff.
Without proper oversight, it is difficult for Firms to monitor that their staff are not intentionally or unintentionally violating important regulatory requirements. Compliance failures can be costly, so it is important that you work with experienced professionals to incorporate a proactive approach to compliance in your Firm.