SEC Scrutinizes Registered Investment Adviser’s Statements to Investors About Due Diligence

On April 23, 2019, the SEC charged a formerly SEC-registered investment adviser CCM and its principal’s investment of $4 million on behalf of two funds they managed. In mid-August 2016, CCM and its founder and chief executive officer Bruce made a $4 million loan on behalf of the two funds to a Norwegian individual and his company, who purported to use the proceeds to engage in trading international notes for huge profits. The Norwegian individual and his entity promised the funds would receive payment of $40 million in 90 days. The Norwegian company made an initial payment of $1.5 million, but never paid the remaining $38.5 million it promised – leaving the funds with a loss of $2.5 million.  CCM and Bruce performed limited due diligence on the investment. CCM and Bruce made misleading statements to fund investors regarding the amount of due diligence performed and the “buy-in” of CCM’s outside professionals.  As a result, CCM and Bruce negligently breached their fiduciary duties to the funds in violation of Section 206(2) of the Advisers Act by failing to disclose that Bruce was a creditor of the Norwegian individual and his company and the resulting conflict of interest, i.e., that Bruce had an incentive for the funds to invest so that it would provide money that could be used to repay Bruce personally. CCM and Bruce also negligently violated Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder through misleading statements to fund investors about the level of due diligence performed on the investment and the “buy-in” of CCM’s outside professionals.  In determining to accept Respondents’ Offer, the Commission considered that Bruce voluntarily disgorged $184,540 of his own money to the Funds in November 2017, to partly cover the Funds’ loss, which represents $66,540 in excess of the $118,000 profit that Bruce made on his own personal investment with the Norwegian individual and his company.  Respondents shall, jointly and severally, pay a civil money penalty of $40,000.