More On Legal & Compliancefrom The Advisor's Professional Library
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
- Suitability and Fiduciary Duty Recommending suitable investments is more than just a regulatory obligation. Many investors bring cases claiming lack of suitability, so RIAs must continuously put the onus on clients to notify the advisor of changes in their financial situation.
The Securities and Exchange Commission announced Wednesday that it has separately charged a pair of hedge fund managers and their firms with lying to investors about how they were handling the money invested in their respective hedge funds.
In one case, the SEC alleges that San Francisco-based hedge fund manager Hausmann-Alain Banet and his firm Lion Capital Management stole more than a half-million dollars from a retired schoolteacher who thought she was investing her retirement savings in Banet’s hedge fund. In the other case, the SEC charged Chicago-based hedge fund managers Norman Goldstein and Laurie Gatherum and their firm GEI Financial Services with fraudulently siphoning at least $147,000 in excessive fees and capital withdrawals from a hedge fund they managed.
The charges are the latest in a series of actions taken by the SEC Enforcement Division and its Asset Management Unit against hedge fund-related misconduct in the markets. On the same day, the SEC’s Office of Investor Education and Advocacy issued an investor bulletin detailing some of those cases as examples of why investors must rigorously evaluate a hedge fund before investing in it.
Since the beginning of 2010, the SEC says it has filed more than 100 cases involving hedge fund malfeasance such as misusing investor assets, lying about investment strategy or performance, charging excessive fees, or hiding conflicts of interest.
This month, the SEC also plans to launch a new examination strategy targeting advisors to hedge and private equity funds who registered in response to the Dodd-Frank Act.
According to the Regulatory Compliance Association, the SEC plans to dispatch “Regulatory Expectation” letters to these advisors, “outlining the new exam approach, requirements and document production obligations.”
The new “Presence Examination” strategy, the Regulatory Compliance Association says, constitutes a new regulatory inspection developed by the Office of Compliance Inspections and Examinations (OCIE), “which seems more comprehensive than the traditional ‘sweep’ examination yet more targeted than the typical routine examination.”
Robert Khuzami (left), director of the SEC’s Division of Enforcement, said in a statement that “these hedge fund frauds have lured even the most sophisticated investors using the siren song of outsized returns or secured and guaranteed investments. As fraudsters increasingly capitalize on the cachet of hedge funds, we will maintain our strong presence in policing this industry.”
In the past few weeks alone, the SEC lists the charges it has brought against hedge fund and private fund managers. The agency has charged an Atlanta-based private fund manager and his firm with defrauding investors in a purported “fund-of-funds” and then trying to hide trading losses, charged a hedge fund adviser in Oregon with running a $37 million Ponzi scheme through several hedge funds he managed, and charged a New York-based hedge fund manager who touted a diversified and controlled-risk investment strategy for his fund while in reality misusing investor assets to prop up a failing private company. The New York-based fund manager also failed to disclose conflicts of interest, and he falsely overstated his firm’s assets under management in various magazine articles he authored.
According to the SEC’s complaint filed against Banet and Lion Capital Management in federal court in San Francisco, Banet led the teacher to believe that his hedge fund would invest in the stock market using a long/short equity investing strategy. Instead, "Banet brazenly took the teacher’s investment totaling $550,000 and used it to pay unauthorized personal and business expenses, including his home mortgage, office rent, and staff salaries. Banet also provided phony account statements showing nonexistent investment gains and listing an independent administrator that performed no actual work for the fund."
In a parallel action, the U.S. Attorney’s Office for the Northern District of California announced criminal charges against Banet.
According to the SEC’s complaint against Goldstein, Gatherum, and GEI Financial Services filed in federal court in Chicago, investors in the hedge fund were not told that its adviser removed various performance hurdles when calculating fees. Furthermore, inappropriate capital withdrawals were made from the fund.
"Goldstein, Gatherum, and their firm never told their advisory clients that Illinois regulators had stripped Goldstein of his securities registrations in 2011, barring him from providing investment advisory services in the state," the SEC said. "But even after losing his registration status, Goldstein continued to make all investment decisions on behalf of clients, and he and Gatherum caused GEI Financial Services to violate compliance rules applicable to SEC-registered investment advisers."