Investment Adviser and Principal Settle Charges for Misleading Communications

A former investment adviser and its principal settled SEC charges for (i) disseminating false communications about the firm's holdings and exposures, (ii) failing to disclose a co-founder's conflicts of interest and (iii) related supervisory failures.

According to the two Orders (see Order 1 and Order 2), the adviser disseminated false statements "regarding the top ten biggest positions that contributed to, and detracted from, the Fund's performance." The adviser's data communications contained falsified information by the adviser's principal and was not reviewed by the adviser's compliance team. The SEC found, among other misrepresentations, that "certain of the materially false and misleading statements in the Investor Communications derived from [the Principal's] modification of underlying portfolio data that was provided to him" by the adviser's employees. The SEC said "the Investor Communications were then distributed to investors without further Compliance review or independent verification of their accuracy."

The SEC further found that the investment adviser and its principal failed to disclose that another co-founder of the investment adviser had a conflict of interest as he operated a separate hedge fund in China.

As a result, the SEC determined that the adviser violated Advisers Act Section 206(2) and Section 206(4) ("Prohibited transactions by investment advisers") and Rules 206(4)-7 ("Compliance procedures and practices") and 206(4)-8 ("Pooled investment vehicles"). 

To settle the charges, the investment adviser and principal agreed to (i) cease and desist from committing violations of the Advisers Act, (ii) a censure and (iii) pay civil money penalties in the amount of $350,000 and $250,000, respectively. The principal was also suspended from industry-related work for 12 months.