SEC Charges Hedge Fund Adviser with Breaching Fiduciary Duty by Participating in Conflicted Principal Transaction

The SEC charged Shadron L. Stastney, a partner at New York-based investment advisory firm Vicis Capital LLC, with breaching his fiduciary duty by engineering an undisclosed principal transaction in which he had a financial conflict of interest. The SEC alleges that Stastney traded as a principal when he authorized the client hedge fund to pay approximately $7.5 million to purchase a basket of illiquid securities from a personal friend and outside business partner hired by the firm as a managing director. Stastney required his friend to divest these personal securities holdings as he came on board at the firm because they overlapped with securities in which the hedge fund was also invested; however, Stastney failed to tell the client hedge fund or any other management at the firm that he had a financial stake in some of the same securities sold to the fund. The SEC alleges that Stastney personally benefited and received a portion of proceeds from the sale, therefore rendering him a principal in the transaction.

Stastney agreed to pay more than $2.9 million to settle the charges.

See: SEC Press Release; SEC Order Against Stastney.For a general discussion of the bar against principal trading by investment advisers, see the Trading Chapter of Lofchie's Guide to Hedge Fund Regulation.