Last week, the SEC instituted cease-and-desist proceedings pursuant to Section 203(k) of the Investment Advisers Act against Gemini Fund Services for its calculation of an inflated NAV when it was aware of inconsistencies with the custodian bank’s records.
As the fund administrator for the GL Beyond Income Fund (the “Fund”), Gemini was responsible for calculating the Fund’s NAV. For a period of time Gemini calculated an NAV that was inflated as a result of including assets in the NAV, where the custodian bank did not include these assets because it had not received appropriate documentation. Gemini erred in that although it did not know that these assets were fake at the time it was calculating the NAV, it did know that there were significant discrepancies between its own records and those of the custodian bank, and it did nothing to address this.
In the order, the SEC highlights Gemini’s failure to take any further steps regarding its knowledge of the discrepancy with the custodian’s records. In fact, the SEC suggests that the next steps should have been to: (1) further investigate the problem with the assets, (2) notify the investing public or the board of directors of the Fund, and/or (3) reduce the share price to reflect the problem.
Pursuant to the proceedings, Gemini was ordered to cease and desist from committing or causing any violations and any future violations of Sections 206(1) and 206(2) of the Advisers Act, and to comply with a number of undertakings, including obtaining the services of an independent compliance consultant to conduct a comprehensive review of, and recommend corrective measures concerning, Gemini’s compliance and other policies and procedures with respect to: (i) NAV calculation and publication; (ii) reconciliation of data with fund custodians; (iii) monitoring of the performance of administrative and professional services rendered to its mutual fund clients by other service providers; (iv) coordination of fund audits; (v) communications with clients, auditors, and others about possible failures to comport with fund governing documents or possible failures to comply with the law by clients or investment advisers; and (vi) detecting and addressing fraud. In addition, Gemini has been ordered to pay a civil monetary penalty of $400,000, disgorgement of $147,334, and prejudgment interest of $14,072.
Click here to access the Administrative Proceeding.