SEC Charges Founder of Registered Investment Adviser with Fraud

February 23, 2022

On February 17, 2022, the SEC charged the founder and former CIO (Founder) of a registered investment adviser (Firm) in connection with a scheme to artificially inflate the asset values and performance results of a mutual fund and a hedge fund that the Firm advised (Funds), in violation of antifraud and other provisions of the federal securities laws.  The complaint seeks permanent injunctive relief, return of ill-gotten gains and civil penalties, and to bar the Founder from serving as an officer or director of a public company.

The SEC complaint alleges that, while the Founder represented to investors that certain holdings of the Funds were valued by an independent third-party pricing service (Pricing Service), he was instead actively manipulating the valuation models of the Pricing Service and altering inputs to mask poor performance.  The SEC complaint also alleges that, by masking actual performance, the Founder sought to thwart redemptions by investors that would otherwise have requested that their money be returned.  The SEC alleges that the Firm overvalued assets by more than $1 billion, and that the actual value of the Funds was at times half of what the Firm represented to investors.

The Founder allegedly collected more than $26 million in profit distributions through his fraudulent conduct.  Further, the SEC alleges that the Founder sent forged term sheets to auditors and sought to deceive SEC staff by creating backdated minutes of valuation meetings that never occurred and altering documents that described valuation policies.

The SEC press release can be found here.

The SEC complaint can be found here.


Categories

Compliance, Enforcement Actions, Investment Advisers, Investment Companies, Miscellaneous, Mutual Funds