2015 SEC Enforcement Round Up

Fees and Expenses

SEC Charges Santa Barbara-Based Hedge Fund Firm, Executives and Auditor for Improper Expense Allocations

Alpha Titans LLC, a Santa Barbara, CA based hedge fund misallocated assets from two affiliated private funds to pay for firm expenses. The SEC investigation found that the firm’s principal, Timothy McCormack, and general counsel, Kelly Kaeser, used private fund assets to pay more than $450,000 in office rent, salaries and benefits, and other expenses without authorization or appropriate disclosure to investors. The firm’s auditor, Simon Lesser, falsely approved of audit reports that the funds’ financial statements were accurately presented. These statements failed to include almost $3 million in expenses to outside entities controlled by McCormack.

McCormack and Kaeser are banned from the securities industry for a year; Kaeser also received a one-year suspension from practicing as an attorney on behalf of any SEC entity. Lesser is barred from practicing as an accountant on behalf of any SEC entity for three years.

SEC Charges KKR With Misallocating Broken Deal Expenses

Private equity firm Kohlberg Kravis Roberts & Co. misallocated over $17 million in “broken deal” expenses to its funds. These expenses, often associated with broken deals, diligence or unsuccessful buyouts, must be allocated equally among all participating funds and co-investors. The SEC marked this lack of disclosure and misallocation as a failure to adopt appropriate policies and procedures for broken deal expense allocation and a breach of fiduciary duty.

KKR is ordered to pay approximately $30 million to settle the charges, including a $10 million penalty.

SEC Charges Seattle-Area Hedge Fund Adviser With Taking Unearned Management Fees

Washington based Summit Asset Strategies Investment Management and its CEO, Chris Yoo, falsely inflated fund asset values in order to generate fees. Yoo incorrectly valued bank assets at approximately $2 million when the actual value was less than $200,000. Additionally, he failed to disclose a conflict of interest with his other firm, Summit Asset Strategies Wealth Management, where he received fees when referring clients to invest in the fund.

Yoo and his firms have been ordered to pay combined disgorgement and fines in excess of $1.3 million. Individually, Yoo is banned from the securities industry.

Conflict of Interest

SEC Charges BlackRock Advisors With Failing to Disclose Conflict of Interest to Clients and Fund Boards

The SEC charged BlackRock Advisors LLC with breaching its fiduciary duty by not disclosing a conflict of interest between Daniel Rice III, a portfolio manager, and his outside business, Rice Energy. Rice was the general partner of Rice Energy, having invested nearly $50 million in the company. Rice Energy, following a joint venture with a publicly-traded coal company, eventually became the biggest holding in BlackRock’s $1.7 billion Energy & Resources Portfolio, managed by Rice. Rice Energy accounted for almost 10% of the fund’s holdings.

BlackRock has paid a $12 million penalty to settle the charges and must engage an independent compliance consultant to conduct an internal review.

SEC Charges Private Equity Firm and Four Executives With Failing to Disclose Conflicts of Interest

New York private equity firm Fenway Partners LLC and its principals Peter Lamm, William Smart, Timothy Mayhew Jr., and CFO Walter Wiacek are charged with failing to disclose conflicts of interest to investors. Through the fund or portfolio companies the individuals caused over $20 million in consulting fees to be paid to an affiliated entity, Fenway Consulting Partners LLC, and other firm employees all while working primarily at Fenway Partners. These fees were never offset against management fees regularly charged to the fund by Fenway Partners, effectively double billing the fund.

Together the parties have agreed to pay over $10 million into a fund for harmed investors.

Compliance Violations

SEC Charges Issuer for Failing to Make Public Filings

The SEC charged W2007 Grace Acquisition I Inc. with failing to make required public filings. In 2007, the firm suspended reporting obligations for its class B and class C preferred shares as the shares had less than 300 holders of record. In 2014, the firm incorrectly counted its holders of record and therefore neglected to report, missing 8 required public filings.

W2007 Grace Acquisition I Inc. agreed to pay $640,000 to settle all charges.

SEC Charges Citigroup Global Markets for Compliance and Surveillance Failures

Citigroup Global Markets was charged with failing to enforce policies and procedures to prevent and detect the misuse of material nonpublic information. It was also charged with failing to prevent and detect principal transactions by an affiliate. The SEC found that Citigroup failed to review thousands of trades by several trading desks over a 10-year period. The firm also routed nearly 500,000 trades to an affiliated market maker who then executed the purchases from its own account.

Citigroup was fined $15 million and ordered to retain a consultant to improve its surveillance and trade order process.

Wolverine Affiliates Charged With Failing to Maintain Policies to Prevent Misuse of Material Nonpublic Information

Wolverine Trading LLC and Wolverine Asset Management LLC were charged by the SEC with failing to maintain and enforce policies and procedures to prevent the misuse of material nonpublic information. Employees at Wolverine Trading repeatedly shared information regarding trading positions, specifically TVIX, an exchange-traded note, with others at Wolverine Asset Management. Wolverine Asset Management unfairly profited from market opportunities it should not have had to the tune of over $350,000.

The firms together have been fined approximately $1.15 million to settle the charges.

SEC Charges Investment Adviser With Failing to Adopt Proper Cybersecurity Policies and Procedures Prior To Breach

R.T. Jones Capital Equities Management, a St. Louis-based investment adviser, was charged with failing to adopt written cybersecurity policies and procedures. For nearly 4 years, the firm stored all sensitive personally identifiable information of its clients on a third-party web server. The firm neglected to take steps to protect client information and was hacked in 2013, giving the intruder access to all data stored on the server.

The firm has been charged with violating Rule 30(a) of Regulation S-P, the “safeguards rule”, and fined $75,000.

Insider Trading

SEC Charges Four in California Insider Trading Ring

John Gray, an analyst at Barclays Capital, along with his friends Christian Keller and Kyle Martin, traded on insider information in advance of several corporate news announcements. They attempted to conceal their actions by trading in another person’s name, using prepaid disposable phones and making structured cash withdrawals. Additionally, Gray shared information with a fourth participant, Aaron Shepard. In total, profits from trading on the nonpublic information amounted to nearly $750,000.

Gray has been barred from the securities industry. Keller has been barred from serving as an officer or director of a public company for 10 years. Martin and Shepard, due to significant cooperation during the SEC’s investigation, were not assessed additional penalties.

SEC Announces Charges Against Atlanta Man Accused of Insider Trading in Advance of Tender Offer

The SEC charged Charles L. Hill for trading in advance of a tender offer by NCR Corporation to purchase Radiant Systems. Hill was aware that his friend, from whom he received the information, was close friends with a Radiant Systems executive. Trading on the nonpublic information, Hill purchased 100,000 shares of Radiant Systems worth nearly $2.2 million and realized a profit of approximately $740,000.

SEC Charges Friends With Insider Trading on Acquisition of Cooper Tire

Amit Kanodia and Iftikar Ahmed, two longtime friends, were charged with trading in advance of an acquisition of Cooper Tire by Apollo Tyres Ltd. Kanodia’s wife was the general counsel at Apollo and heavily involved in the deal. She shared this information with her husband, Amit, who then passed the information to his friend Ahmed and another party. Ahmed purchased significant shares in Cooper Tire and sold them immediately following the announcement for a gain of over $1.1 million. As a kickback, Ahmed transferred $220,000 to a charity controlled by Kanodia.

SEC Charges Father and Son in $1.1 Million Insider Trading Scheme

The SEC charged Sean Stewart, a managing director at an investment bank, with providing insider information about future mergers and acquisitions to his father, Robert Stewart. Robert placed trades ahead of more than half a dozen merger and acquisition announcements. Over four years, proceeds from these trades exceeded $1.1 million. Although the duo tried to use in-person meetings and coded e-mails to discuss trades, the SEC claims new technology helps identify relationships among traders and even suspicious trading across multiple securities.


SEC Announces Fraud Charges Against Purported Hedge Fund Manager

Moazzam Malik, a purported New York hedge fund manager, solicited investors in order to fund his extravagant lifestyle. By promising investors high returns, he raised over $800,000 although his fund never held more than $90,000. Malik attempted to continue recruiting new investors amidst redemption requests by changing the name of his firm several times and even going so far as to create a fictitious employee to represent to one investor that Malik had died.

SEC Halts Ponzi-Like Scheme by Purported Capital Fund Manager in Buffalo

Gregory Gray Jr. and his firms Archipel Capital LLC and BIM Management LP are charged with operating a Ponzi-like scheme in New York. Gray and his firms solicited money for pre-IPO shares in high-profile companies including Twitter and Uber at a low price, raising almost $5.3 million. When Gray was unable to purchase these shares, he falsified stock purchase agreements and paid investors with the stolen funds.

SEC Announces Fraud Charges Against Investment Adviser Accused of Concealing Poor Performance of Fund Assets From Investors

Lynn Tilton and her firm, Patriarch Partners, are charged with defrauding investors and collecting fees stemming from false valuations. The New York based firm failed to value assets in the manner described in the funds’ offering documents. Tilton’s practices hid the declining value of the assets from investors and caused nearly $200 million in unearned fees to be generated for the firm.

SEC Charges Hedge Fund Advisory Firm With Conducting Fraudulent Fund Valuation Scheme

The SEC charged the Connecticut-based firm AlphaBridge Capital Management with fraudulently inflating the prices of securities in its hedge fund portfolios. The firm provided internal valuations to broker-dealers to pass of as their own. These valuations were then provided to investors leading them to believe they were receiving these securities at a discount.

AlphaBridge and its owners have paid a combined $5 million to settle the charges.

SEC Charges New Jersey Fund Manager With Securities Fraud

William Wells, through his firm Promitor Capital Management, solicited investors by falsely holding himself out as an investment adviser to invest in certain stocks. Wells raised in excess of $1.1 million for his highly speculative options trading that resulted in a total loss of funds. In order to raise additional funds to pay back redemption requests, Wells falsified account statements showing positive returns and provided them to new investors.

Wells is the subject of an ongoing SEC investigation and faces criminal charges in New York.

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