SEC Charges Former Executives of Registered Investment Adviser with Fraud

On September 30, 2021, the SEC charged the former CEO of an advisory firm (Firm), and the Firm’s former chief portfolio manager (PM), for their roles in the Firm’s scheme to artificially inflate the net asset values (NAV) and performance results of several of its funds.

The order finds that, through the former CEO’s actions, the Firm fraudulently inflated the NAVs and performance of its funds by recording non-binding transactions and fraudulent investment banking fees on the funds’ records. The inflated NAVs and false performance results showed the funds as always having positive monthly returns, which were included in promotional materials and account statements distributed to the funds’ current and prospective investors. In fact, absent the fraudulently booked transactions, the funds had at least 34 months of negative returns since inception. The order also finds that the former CEO, on multiple occasions, chose to waive monthly management and performance fees owed by the funds to the Firm or a company affiliated with the Firm to inflate performance results, without disclosing that the higher figures were due to the fee waivers.

The order against the former PM finds that the former PM included the non-binding transactions and fraudulent investment banking fees in data the former PM prepared that was used to calculate the funds’ asset values and performance results.

Without admitting or denying the SEC’s findings, the former CEO and former PM each agreed to the entry of a cease-and-desist order. The former CEO agreed to be barred from the securities industry, and to pay disgorgement of overcharged fees of $4,409,546 plus prejudgment interest of $755,178, and a penalty of $292,570. The former PM agreed to a limitation on activities from acting in a director or officer capacity in the securities industry, with a right to reapply after three years, and to pay a penalty of $50,000.

The order against the former CEO can be found here.

The order against the former PM can be found here.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm or its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.