Enforcement: Hedge Fund to Repay Nearly $3M for Hiding Losses From Investors

According to the agency, Goldman Sachs improperly provided locates to customers selling short when it had not performed an adequate review of the securities to be located. (Granting a “locate” represents that a firm has borrowed, arranged to borrow, or reasonably believes it could borrow the security to settle the short sale.) Such locates were inaccurately recorded in the firm’s locate log that must reflect the basis upon which Goldman has given out locates.

SEC examiners questioned the firm’s securities lending practices in 2013, but Goldman Sachs provided incomplete and unclear responses that, according to the agency, “adversely affected and unnecessarily prolonged the examination.”

Members of Goldman Sachs’ Securities Lending Demand Team routinely processed customer locate requests by relying on an F3 key function of the firm’s order management system known as “fill from autolocate.” That function allowed employees to get the system to grant locate requests based on outdated information from the start of the day — even though by the time the locate requests came in the automated system had determined the inventory depleted based on the day’s earlier locate requests that had already been processed. Employees simply trusted that the automated model was conservative enough that when the time came to deliver the securities, there would be sufficient quantities available to cover deliveries. They did not check alternative sources or check to be sure that quantities would be adequate.

In addition, documentation failed to adequately distinguish between locates filled by the automated model and those that the Demand Team filled via the F3 key function.

While the firm neither admitted nor denied the SEC’s charges, it agreed to the $15 million penalty.

SEC Freezes Assets in Suspected Oil and Gas Investment Fraud

The SEC has won a temporary restraining order halting an investment offering it says is fraudulent, as well as an asset freeze against the defendants’ assets.

According to the agency, since at least June 2013, Dallas-based Sedona Oil and Gas Corp. and its president, Kenneth “Kenny” Crumbley Jr., have raised approximately $3.3 million from 55 investors through the fraudulent offer and sale of securities in six oil and gas investment programs.

Although the defendants’ offering materials claimed that 100% of investor funds would be used to cover expenses associated with drilling, testing and completing wells located in Texas, Tennessee and Kentucky, instead the SEC said that the defendants spent more than 60% of investor funds instead on such expenditures as Sedona’s daily operating expenses, defending a lawsuit by an earlier investor, repayment of loans from another Crumbley-controlled company, personal expenses of Crumbley and his family and Ponzi payments to investors in earlier offerings.

The SEC also said that the defendants lied to investors about the use of geologists to assess and endorse the prospects, falsely promised annual investment returns ranging from 37% to 276%, lied about how much was paid out to prior investors, and failed to disclose the poor quality of several surrounding and nearby wells. They also destroyed evidence in the months leading up to the SEC’s court action, and Crumbley even threatened to fire Sedona employees for speaking with SEC staff or other government authorities.

In addition to the asset freeze and restraining order, the SEC has also won the appointment of a receiver over the defendants’ assets. The agency seeks disgorgement of ill-gotten gains, prejudgment interest, and civil penalties against both defendants.

— Check out Convicted Inside Traders Look to Supreme Court for Redemption on ThinkAdvisor.