Self-Dealing Charges Brought Against a Hedge Fund Adviser

September 29, 2015

The SEC charged Lee D. Weiss, Family Endowment Partners, L.P. (FEP) and others with engaging in a pattern of self-dealing and failing to disclose material facts to clients concerning their conflicts of interest, their use of investor funds, and the risks associated with the investments that they recommended or made on behalf of investors in hedge funds they advised.

Between 2010 and 2012, the SEC found that Weiss and FEP advised and caused individual FEP clients, as well as two hedge funds advised by FEP, to invest more than $40 million in subsidiaries of a French company that purportedly had designed methods to reduce the harmful effects of tobacco smoking. In promoting these illiquid securities, Weiss and FEP failed to disclose Weiss’s multiple conflicts of interest arising from his personal investment in the parent French company and his contemporaneous receipt, directly or indirectly, of over $600,000 in payments from the company.

Between late 2012 and 2014, Weiss and FEP advised and caused five FEP clients to invest approximately $8.25 million in notes or shares of companies under Weiss’s ownership or control. The SEC stated that Weiss and FEP breached their fiduciary duties to these clients by failing to disclose that they intended to use the invested funds not for the benefit of Weiss’s companies that issued the notes or shares, but primarily to pay millions of dollars in delinquent debt and business expenses (such as payroll and rent) of FEP.

In late 2011, Weiss and FEP advised and caused four FEP clients to invest $5 million in a consumer loan portfolio managed by a specialty financing company. However, Weiss and FEP according to the SEC failed to disclose that Weiss stood to profit from these investments through a sham structure that he implemented. Although the financing company offered to pay an annual return of approximately 18% on invested principal, Weiss arranged for the clients to receive a lesser return of approximately 9%. The SEC stated that Weiss pocketed the difference for himself by routing the other payments through a purported third-party “manager,” which was supposed to provide insurance for the investments, but, in fact, performed no services.

The SEC also found that Weiss and FEP managed at least one the hedge funds in a manner that was inconsistent with the investment strategy described in the offering materials for this fund. Furthermore, FEP did not prepare and distribute audited financial statements to hedge fund investors or, alternatively, cause a surprise examination of FEP to occur in violation of the custody rules under the Advisers Act. FEP also failed promptly to update its Form ADV.

Click to access the complaint.


Investment Advisers, Investment Companies