SEC Fines Adviser for Failing to Disclose "Control" Purpose

An investment adviser settled charges with the SEC for failing to timely disclose the adviser's "control" purpose, with respect to an issuer whose shares it had acquired for the account of a hedge fund that it managed.

In the Order, the SEC said that after the adviser's client exceeded the five percent beneficial ownership threshold, the adviser filed an initial Schedule 13G with the SEC expressly certifying that "the securities … were not acquired and are not held for the purpose of or with the effect of changing or influencing the control of the issuer [or] held in connection with or as a participant in any transaction having that purpose or effect." The SEC said that the certification did not include all of the representations the adviser was required to make because it did not state that the securities "were acquired and are held in the ordinary course of business."

The SEC said that the adviser continued to purchase additional shares during the relevant period, ultimately giving it total beneficial ownership of approximately 9.9% of the outstanding shares of the issuer. The SEC found that the adviser held the issuer's shares with the intent to change or influence control of the issuer. The SEC said that the adviser should have timely filed a Schedule 13D, but it did not do so until the day that it submitted to the issuer, and publicly announced, a proposal to acquire all of the issuer's shares.

The SEC found that the investment adviser violated Section 13(d) of the Exchange Act ("Periodical and other reports") and SEA Rule 13d-1 ("Filing of Schedules 13D and 13G").

To settle the charges, the adviser agreed to a (i) cease and desist of future violations of Section 13(d)(1) and Rule 13d-1 and (ii) a civil money penalty in the amount of $950,000.