FINRA Bars Two for Fraud in Hedge Fund Sale
FINRA barred two Buffalo-based brokers from the securities industry for fraudulent conduct arising from the marketing of a hedge fund. FINRA found that the brokers fraudulently misrepresented and omitted information about the nature of the hedge fund and the manager's experience. The fund's offering materials claimed that it featured algorithm-based investing, risk protection and stop-losses, but according to FINRA, the fund was a highly speculative investment without such algorithmic strategies and protections. The fund lost 80% of its value during the last full month in which it was traded, and the brokers in question consented to the entry of FINRA's findings.
Commentary
While it is unclear how the salespersons knew that the private placement memorandum ("PPM") contained material misrepresentations, this case should remind all broker-dealers selling shares in a private fund to conduct proper due diligence concerning the information contained in the fund's PPM and any other offering materials that the broker-dealer might use in the fundraising process.