Adviser Charged with Improper Expense Allocations Among Fund Clients

April 29, 2015

The SEC brought an enforcement action against Alpha Titans LLC,an adviser to private funds, and Timothy P. McCormack and Kelly D. Kaeser, two of its executives for making 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.

 

The SEC found that Alpha Titans and the officers used assets of two 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 SEC stated that 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.

 

According to the SEC, Alpha Titans did not make the proper disclosures for clients to understand that the funds were footing the bill for many of the firm’s operational expense.  The SEC noted that private fund managers must be fully transparent about the type and magnitude of expenses they allocate to the funds.

 

The SEC stated that 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.  It found that Alpha Titans violated the custody rule by distributing financial statements that were not GAAP compliant.

 

Alpha Titans and McCormack agreed to settle the SEC’s charges, agreeing 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.  Kaeser 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.

Click Here to access the enforcement action


Categories

Investment Advisers