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.
- Anti-Fraud Provisions of the Investment Advisers Act RIAs and IARs should view themselves as fiduciaries at all times, whether they meet the legal definition or not. Deviating from the fiduciary standard of full disclosure while courting clients may cause the advisor significant problems.
The Securities and Exchange Commission on Friday charged a Houston-based hedge fund manager, George Jarkesy Jr., and his firm, John Thomas Capital Management, of defrauding investors in two hedge funds and steering bloated fees to Thomas Belesis, CEO of John Thomas Financial.
Belesis, who appeared in the film Wall Street 2: Money Never Sleeps, also is charged in the SEC’s case.
An investigation by the SEC’s Enforcement Division found that Jarkesy worked closely with Belesis to launch two hedge funds that raised $30 million from investors.
Jarkesy and his firm, John Thomas Capital Management (since renamed Patriot28), inflated valuations of the funds’ assets, causing the value of investors’ shares to be overstated and his management and incentive fees to be increased, according to the SEC. Jarkesy, a frequent media commentator and radio talk show host, also lied to investors about the identity of the funds’ auditor and prime broker, the SEC says.
Meanwhile, the SEC says that although they shared the same John Thomas brand name, Jarkesy’s firm and Belesis’ firm were portrayed as wholly independent. Jarkesy led investors to believe that as manager of the funds, he was solely responsible for all investment decisions.
However, the SEC says, “Belesis sometimes supplanted Jarkesy as the decision maker and directed some investments from the hedge funds into a company in which his firm was heavily invested. Belesis also bullied Jarkesy into showering excessive fees on John Thomas Financial even in instances where the firm had done virtually nothing to earn them.”
According to the SEC’s order, Jarkesy violated his fiduciary duties to the funds in multiple instances by providing excessive compensation to Belesis and John Thomas Financial. This only incited further demands by Belesis.
For example, in February 2009, Belesis angrily complained via e-mail that Jarkesy was not steering enough money to John Thomas Financial, and Jarkesy responded that “we will always try to get you as much as possible, Everytime [sic] without exception!” On another occasion, Jarkesy reassured Belesis that “[n]obody gets access to Tommy until they make us money!!!!!”
Andrew Calamari, director of the SEC’s New York Regional Office, said in a statement that “Jarkesy disregarded the basic standards to which all fund managers are held. Not only did he falsify valuations and deceive investors about the value of their holdings, but he bent over backwards to enrich Belesis at the funds’ expense. Belesis in turn exploited the supposed independence of the funds to surreptitiously pull the strings on key decisions.”
According to the SEC’s order instituting administrative proceedings against Jarkesy, Belesis and their firms, Jarkesy launched the two hedge funds, John Thomas Bridge and Opportunity Fund LP I and John Thomas Bridge and Opportunity Fund LP II, in 2007 and 2009. The funds invested in three asset classes: bridge loans to startup companies, equity investments principally in microcap companies, and life settlement policies.
Says the SEC: “Jarkesy mispriced certain holdings to increase the net asset values of the funds, which were the basis for calculating the management and incentive fees that Jarkesy deducted from the funds for himself. Jarkesy also falsely claimed that prominent service providers such as KPMG and Deutsche Bank worked with the funds.”
According to the SEC’s order, Jarkesy used fund assets to hire multiple stock promoters in 2010 and 2011 to create an artificial and unsustainable spike in the price of two microcap stocks in which the funds were heavily invested. As a result of these efforts, the funds recorded temporary gains in the value of the microcap stocks that Jarkesy used to mask the writedown of other more illiquid holdings of the funds.