The Securities and Exchange Commission today announced charges against a Santa Barbara, Calif.-based hedge fund advisory firm and two executives involved in improper allocations of fund assets to pay undisclosed operating expenses. The SEC also charged an accountant who conducted the outside audit of misleading financial statements that the firm sent to investors.
An SEC investigation found that Alpha Titans LLC, its principal Timothy P. McCormack, and general counsel Kelly D. Kaeser used assets of two affiliated private funds to pay more than $450,000 in office rent, employee salaries and benefits, and similar expenses without clear authorization from fund clients and without accurate and complete disclosures that fund assets were being used for these purposes. The firm’s outside auditor Simon Lesser was aware of how Alpha Titans used fund assets but still gave his final approval of audit reports containing unqualified opinions that the funds’ financial statements were presented fairly.
The firm, both executives, and the auditor agreed to settle the SEC’s charges.
“Alpha Titans did not make the proper disclosures for clients to decipher that the funds were footing the bill for many of the firm’s operational expenses,” said Marshall S. Sprung, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “Private fund managers must be fully transparent about the type and magnitude of expenses they allocate to the funds.”
According to the SEC’s orders instituting settled administrative proceedings, Alpha Titans, McCormack, and Kaeser sent investors audited financial statements that failed to disclose almost $3 million in expenses tied to transactions involving other entities controlled by McCormack. Lesser engaged in improper professional conduct while auditing the funds’ financial statements by not considering the adequacy of the related party disclosures in the funds’ financial statements. Alpha Titans violated the custody rule by distributing financial statements that were not GAAP compliant.
To settle the SEC’s charges, Alpha Titans and McCormack agreed to pay disgorgement of $469,522, prejudgment interest of $28,928, and a penalty of $200,000. McCormack and Kaeser each agreed to be barred from the securities industry for one year, and Kaeser agreed to a one-year suspension from practicing as an attorney on behalf of any entity regulated by the SEC. Lesser agreed to pay a penalty of $75,000 and consented to an order suspending him from practicing as an accountant on behalf of any entity regulated by the SEC for at least three years. The firm and the three individuals settled the charges without admitting or denying the SEC’s findings.
The SEC’s investigation was conducted by Ronnie B. Lasky, C. Dabney O’Riordan, and Dan Pines of the Asset Management Unit along with Carol Shau and Megan T. Monroe. The SEC examination that led to the investigation was conducted by Charles Liao, John K. Kreimeyer, Nicholas Mead, and Andy Ganguly of the SEC’s Los Angeles office.