The Securities and Exchange Commission today charged a Nashville, Tenn.-based investment advisory firm and its owner with scheming to collect extra monthly fees from a pair of hedge funds they managed.
Examiners in the SEC’s Atlanta office detected the misconduct during an examination of Hope Advisers Inc., which is owned by Karen Bruton. The SEC alleges that in order to circumvent the funds’ fee structure under which the firm is entitled to fees only if the funds’ profits that month exceed past losses, Hope Advisers and Bruton have been orchestrating certain trades that enable the funds to realize a large gain near the end of the current month while basically guaranteeing a large loss to be realized early the following month. Without the fraudulent trades, Hope Advisers would have received almost no incentive fees since October 2014.
“We allege that Hope Advisers and Bruton disregarded investors by engaging in a pattern of deceptive trades so they could continue earning large incentive fees,” said Walter Jospin, Director of the SEC’s Atlanta Regional Office.
Hope Advisers and Bruton have consented to an interim order that restricts them from accessing $7 million of their own investments in the funds, prohibits them from collecting any further fees unless they satisfy the high water mark in the funds’ fee structure, and restricts them from taking additional investments in the fund. Without admitting or denying the allegations, Hope Advisers and Bruton also are preliminarily enjoined from violating the antifraud statutes of the federal securities laws.
According to the SEC’s complaint filed in federal court in Atlanta:
- The two private hedge funds managed by Hope Advisers and Bruton – named Hope Investments LLC and HDB Investments LLC – have more than $175 million in net asset value.
- Hope Advisers receives its only compensation for managing the funds in the form of an incentive fee, calculated as a share of the profits (10 or 20 percent) earned in the funds’ accounts each month.
- Hope Advisers and Bruton engaged in a continuous pattern of trading to inflate their compensation from the funds. They not only delayed realization of trading losses but also intentionally sized certain trades so the funds realized a profit every month.
- The scheme has enabled Hope Advisers to avoid realization of more than $50 million in losses in the hedge funds while earning millions of dollars in fees to which they were not entitled.
- Without the fraudulent trades, Hope Advisers would have received almost no incentive fees from at least October 2014 through the present.
The SEC’s complaint charges Hope Advisers and Bruton with violating or aiding and abetting violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 as well as Sections 206(1), (2) and (4) of the Investment Advisers Act of 1940, and Rule 206(4)-8. The SEC’s complaint seeks disgorgement of ill-gotten gains plus interest and penalties as well as permanent injunctions.
The complaint also names Bruton’s charity called Just Hope Foundation as a relief defendant for the purposes of returning money it received out of the fees to which the firm was not entitled. The complaint does not allege that the Just Hope Foundation participated in the wrongdoing.
The SEC examination that uncovered the misconduct was conducted by Jamila Abston, Elaina Labossiere, and Ed McConnell under the supervision of Bill Royer and with assistance from Terry Moran in the Chicago office and Jim Richardson in the Miami office. The ensuing investigation was conducted by Peter Diskin, Graham Loomis, Joshua Mayes, Robert Gordon, and Grant Mogan in the Atlanta office with assistance from Mr. Moran and Mr. Richardson. The investigation was supervised by William P. Hicks, the Associate Regional Director of Enforcement in the Atlanta office.