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SEC Charges Unregistered Fund Manager

SEC Charges Unregistered Fund Manager


On October 26, 2017, the SEC charged an unregistered investment adviser and its principals (“collectively, the “Respondents”) with engaging a private fund it managed (the “Fund”) in conflicted transactions without providing disclosure to the investors. The conflicted transactions that Respondents performed includes the following:

  • Investing $500,000 in a new trading venture in which the principals and other owners of the investment adviser held ownership interest;
  • Loaning $600,000 to a wholly owned subsidiary of the trading venture without producing any loan documents;
  • Loaning $250,000 to one of the principals to fund his ownership interest in the trading venture, which defaulted;
  • Overcharging the Fund by nearly $950,000 to pay for all of the investment adviser’s overhead expenses (including the salaries of the adviser’s employees) despite the fund documents only permitting coverage of operating expenses; and
  • Arbitrarily allocating and reallocating Fund holdings and cash to investors, without regard to the terms set forth in the offering documents.

In addition to causing numerous conflicted transactions, the Respondent engaged in a variety of other fraudulent activities, including:

  • Sending investors statements with holdings valued at the original cost of investment despite indications of the holdings being worthless;
  • Sending misleading communication to investors that concealed the fact that certain holdings had been deemed worthless; and
  • Failing to return available cash to investors requesting redemptions and instead using it to allocate new investments to the investors.

Respondent’s engagement in the above activities were in direct violation of Sections 206(1), 206(2) and 206(4) of the Advisers Act.  Accordingly, Respondents were ordered to pay disgorgement of $685,514.73, prejudgment interest of $42,791.38 and a civil money penalty of $275,000.


The SEC’s charges against Respondents reiterates the applicability of antifraud provisions for investment advisers, whether they are registered or not.  Advisers should have an effective compliance program that can ensure the adviser abides by these antifraud provisions.  Furthermore, written policies and procedures should be implemented that review all business operations and guarantee the adviser follows the terms of any governing documents, including PPMs, LPAs and subscription agreements. If you have any questions or concerns about this enforcement action, please contact Fairview®.