Investment Advisor's Act of 1940: Administrative Proceeding: Centaur Management Co. LLC (SEC Release)

From January 1, 2006 until April 2, 2009, Centaur Management, a registered investment adviser, directed its client, Argent Classic Convertible Arbitrage Fund, to provide Centaur with approximately $15 million in interest free loans. Centaur used these loans to fund the payroll for employees who provided management and accounting services for up to fourteen related funds.

Centaur failed to disclose the loan practice to Argent Classic investors, and thus deprived Argent Classic of its use of capital. The loans were described in Argent Classic's audited financial statements as payroll receivables, but were not disclosed as interest-free loans directed by Centaur, or that they were being used to cover payroll expenses for funds other than Argent Classic. As a result, Centaur violated Section 206(2) and Section 206(4) of the Advisers Act.

Although the loan was ultimately repaid, Centaur Management's practice of taking interest-free loans from Argent Classic constituted an unauthorized use of Argent Classic's assets. As the investment adviser to Argent Classic, Centaur owed a fiduciary duty to its client, which was breached by inappropriately depriving Argent Classic of the use of its capital.

The SEC deemed it appropriate for Centaur Management to pay disgorgement of $172,438 (the appropriate interest it would have accrued from the loans), and a prejudgment interest of $41,884 to the SEC. Centaur is also ordered to pay $150,000 in civil money penalty to the SEC. (It would appear that Centaur escaped with a relatively mild penalty considering the seriousness of the charges.)

View notice in full here (links externally to SEC website).