Misleading Investor Newsletters: Firm Principal Charged by SEC for Omitting Facts

WHAT HAPPENED?

The owner and principal of an Indiana-based investment advisory firm was recently fined by the U.S. Securities and Exchange Commission for knowingly misleading private fund investors. The violations took place throughout 2017 when the firm’s principal approved a series of extremely optimistic investor newsletters.

The newsletters, which omitted key information about failing portfolio companies, were provided to investors in a private fund affiliate of the firm on a quarterly basis. A primary strategy of the fund was to issue private loans, with certain liquidity incentives, to a variety of businesses. Under this model, the fund invested in multiple industries, including a furniture business and a software company. These portfolio companies both had negative cashflows and, quickly after engaging with the fund, began to miss required interest payments.

Although the firm principal was aware of the tenuous financial situation of the portfolio companies, he continued to approve newsletters that presented a more encouraging narrative to investors. The newsletters made no mention of the missed interest payments and negative cashflow of the companies and wrongly implied business was improving. Newsletters also contained charts that reflected what annual returns would be if interest payments were made, instead of relating the actual projected returns and accounting for missed payments and declining revenues.

On three occasions, the principal reviewed and approved newsletters for distribution to investors and did not take measures to correct or elaborate on the actual financial condition of the portfolio companies. The lack of transparency potentially harmed investors, as they were not provided crucial information that may have affected their investment decisions.

When the SEC was made aware of the misleading newsletters and the principal’s knowledge of the misinformation, the commission moved to charge the firm with violating provisions of the Advisers Act requiring firms not to mislead investors in pooled investment vehicles. The principal was ordered to pay a fine of $30,000 for the wrongdoing.

WHAT DOES THIS MEAN FOR ME?

The principal could have avoided harming investors by presenting a more transparent review of the failing portfolio companies in the investor newsletters. Providing shareholders with more comprehensive information about the activities of the companies may have affected their decision to continue investing with the fund.

Your firm should have policies and procedures in place for maintaining accurate and complete communication with clients. Address discrepancies immediately if you know or suspect that investor communications or marketing materials produced by your firm could be misleading. If you have questions about meeting disclosure requirements for your firm’s external documentation, Fairview can help. Contact us today for more information about what we can do for your compliance program.

About the Author:

Fairview®
Founded in 2005 with the goal of developing streamlined solutions for investment advisers, Fairview® is now servicing investment advisers, foundations, and funds with nearly $300 billion in collective assets.