1. On September 27, 2022, the SEC announced charges against 15 broker-dealers and one affiliated investment adviser for widespread and longstanding failures by the firms and their employees to maintain and preserve electronic communications. The firms admitted the facts set forth in their respective SEC orders, acknowledged that their conduct violated recordkeeping provisions of the federal securities laws, agreed to pay combined penalties of more than $1.1 billion, and have begun implementing improvements to their compliance policies and procedures to settle these matters. https://www.sec.gov/news/press-release/2022-174
The following eight firms (and five affiliates) have agreed to pay penalties of $125 million each:
- Barclays Capital Inc.
- BofA Securities Inc. together with Merrill Lynch, Pierce, Fenner & Smith Inc.
- Citigroup Global Markets Inc.
- Credit Suisse Securities (USA) LLC
- Deutsche Bank Securities Inc. together with DWS Distributors Inc. and DWS Investment Management Americas, Inc.
- Goldman Sachs & Co. LLC
- Morgan Stanley & Co. LLC together with Morgan Stanley Smith Barney LLC
- UBS Securities LLC together with UBS Financial Services Inc.
The following two firms have agreed to pay penalties of $50 million each:
- Jefferies LLC
- Nomura Securities International, Inc.
Cantor Fitzgerald & Co. has agreed to pay a $10 million penalty.
2. On September 23, 2022, Wave Equity Partners LLC (“Wave Equity”), a SEC registered investment adviser to a private equity fund it managed failed to adequately to disclose to investors and potential investors in that fund information concerning management fee offsets. From May 2018 through October 2020, Wave Equity borrowed money from a private equity fund that it managed, the Wave Equity Fund, LP II (“Fund II”), to pay placement agent fees to a third-party vendor. The offering and governing documents for Fund II and its affiliated vehicles required prompt repayment of the loan through an offset of the quarterly management fees Wave Equity charged and collected for its management of Fund II. Wave Equity failed timely to repay Fund II or reimburse Fund II through offsets. In addition, Wave Equity failed adequately to disclose to investors and potential investors its failure to repay the amounts owed in the manner required by Fund II’s governing documents. Wave Equity agreed to pay a civil money penalty in the amount of $325,000. https://www.sec.gov/litigation/admin/2022/ia-6146.pdf
3. On September 23, 2022, the SEC filed charges against Brian Lam and his company, NineSquare Capital Partners LLC, for targeting the Vietnamese-American community in an $11.7 million offering fraud. The SEC charged Lam and NineSquare with securities and investment adviser fraud and with securities offering registration violations. The SEC also charged Nathan Nguyen and his company, Nguyen Group LLC, with securities offering and broker-dealer registration violations for his role in raising money from investors. Lam and NineSquare told investors that they would use their money to trade securities . reported monthly returns ranging from 1.24% to 100%. Lam used less than 60% of the investors’ money to trade securities, lost almost all of that money through losing trades, and misappropriated the rest to benefit himself and make Ponzi-like payments to certain investors, among other things. Nguyen and the Nguyen Group were principally responsible for raising money from investors through his Money Smarts classes that they promoted on Nguyen’s website. Lam used proceeds from the fraud to partially pay for luxury homes purchased in their names. The matter is being litigated. https://www.sec.gov/litigation/litreleases/2022/lr25518.htm
4. On September 22, 2022, the SEC announced the filing of a civil injunctive action against James McDonald, Jr. and his SEC-registered investment adviser firm, Hercules Investments, LLC in connection with two fraudulent securities offerings. McDonald, a former guest commentator on CNBC, raised more than $5.1 million from 23 investors and clients, and misappropriated more than $2.9 million of those funds for personal expenses and Ponzi-like payments to earlier investors. McDonald raised over $3.6 million from investors for the stated purpose of trading securities through an investment vehicle called the Index Strategy Advisors Fund and that McDonald used less than half those funds for trading and did not engage in any trading with the funds for long stretches of time. McDonald misappropriated more than $1 million of the funds for personal expenses, including luxury vehicles and paying rent on his home, and misappropriated more than $2 million of the funds for Ponzi-like payments, payments to his Hercules’ investment adviser clients and expenses associated with operating Hercules. McDonald raised $1.5 million through the sale of equity investments in Hercules’s business. McDonald falsely represented that investor funds would be used to expand Hercules’s business, lied about the firm’s financial condition, and failed to disclose that he had promised Hercules clients that the firm would repay earlier losses. McDonald commingled the investor funds with Hercules assets and his personal assets, and used $440,000 of those funds for personal expenses, including to pay his personal credit card bills. The matter is being litigated. https://www.sec.gov/litigation/litreleases/2022/lr25515.htm
5. On September 21, 2022, the SEC filed charges against David Sheldon Wells, a former representative of an SEC-registered broker-dealer and investment advisory firm, for misappropriating advisory client funds. Wells misappropriated over $683,000 from three of his investment advisory clients. Wells fraudulently solicited the clients to give him money to invest on their behalf through the broker-dealer and investment advisory firm. Wells told the clients to purchase cashiers’ checks made out to a corporate entity that he created shortly before misappropriating their funds. Wells then transferred their funds to personal brokerage accounts owned or controlled by him, where he lost nearly all the funds through risky options trading. Wells also spent some of his clients’ funds on personal expenses. The matter is being litigated. https://www.sec.gov/litigation/litreleases/2022/lr25513.htm
6. On September 20, 2022, the SEC filed a settled action against registered against registered investment adviser, Toews Corporation (“Toews”), for proxy votes on behalf of clients without taking any steps to determine whether the votes were in the clients’ best interests, and for failing to implement policies and procedures reasonably designed to ensure it voted client securities in the best interests of its clients. The SEC’s order finds that from January 2017 through January 2022, Toews directed a third-party service provider it engaged to cast proxy votes on behalf of registered investment companies (“RICs”) Toews managed to always vote in favor of proposals put forth by the issuers’ management and against any shareholder proposals. According to the SEC’s order, in connection with over two hundred shareholder meetings, Toews caused the third-party service provider to vote the RICs’ securities pursuant to this standing instruction without exception and without any review by Toews of the proxy materials associated with those votes. Toews did not otherwise take steps to determine whether the votes were cast in the RICs’ best interests and failed to implement policies and procedures reasonably designed to ensure that Toews voted proxies in its clients’ best interests, as required by the Investment Advisers Act of 1940. Toews consented to a cease-and-desist order, a censure, and agreed to pay a civil monetary penalty of $150,000. https://www.sec.gov/litigation/admin/2022/ia-6139.pdf
7. On September 20, 2022, the SEC filed a settled action against registered representative and investment adviser representative John Mendes and former corporate insider Andre Dabbaghian, charging them with insider trading in the securities of Layne Christensen Company (“Layne”) before the February 14, 2018 public announcement that Granite Construction Inc. (“Granite”) had agreed to acquire Layne for $565 million. Mendes obtained material nonpublic information about the acquisition from his close friend Dabbaghian, who was employed at Granite and helped negotiate the acquisition of Layne. Mendes used the information that Dabbaghian recklessly provided to purchase Layne securities for Mendes’s wife, parents, and at least 17 other brokerage customers and advisory clients. As a result of Mendes’s unlawful trades, his wife, parents, and customers and clients made profits of approximately $33,200, $9,200, and $127,400, respectively. Mendes was barred. https://www.sec.gov/litigation/litreleases/2022/lr25512.htm
8. On September 19, 2022, the SEC settled charges against New York-based registered investment adviser Arcadia Wealth Management, Inc. for violating Commission rules designed to safeguard advisory client assets. Registered investment advisers that have custody of client assets are subject to the “custody rule,” which requires them to obtain an annual surprise examination by an independent public accountant to verify the existence of such assets that is conducted pursuant to a written agreement setting forth specified requirements. The SEC’s order finds that Arcadia failed to obtain surprise examinations in accordance with the custody rule for client assets over which it had custody from at least 2013 through 2019. The order also finds that Arcadia failed to adopt and implement written policies and procedures reasonably designed to prevent custody rule violations. Arcadia consented to a cease-and-desist order and a censure, and agreed to pay a civil money penalty of $90,000. Arcadia also agreed to an undertaking to have its Chief Compliance Officer complete 30 hours of compliance training. https://www.sec.gov/litigation/admin/2022/ia-6137.pdf
9. On September 19, 2022, the SEC issued a Risk Alert about upcoming review areas during examinations. On December 22, 2020, the SEC adopted significant reforms under the Investment Advisers Act of 1940 to modernize rules that govern investment adviser advertisements and payments to solicitors. These amendments resulted in a single rule that replaced previous advertising and cash solicitation rules. The Marketing Rule requires advisers to make and keep records of all advertisements they disseminate, including certain internal working papers, performance related information, and documentation for oral advertisements, testimonials, and endorsements.
The SEC Staff will conduct examinations focusing on the following areas:
- Marketing Rule Policies and Procedures. The staff will review whether advisers have adopted and implemented written policies and procedures that are reasonably designed to prevent violations by the advisers and their supervised persons of the Advisers Act. In the Marketing Rule Adopting Release, the Commission stated its belief that “… for these compliance policies and procedures to be effective, they should include objective and testable means reasonably designed to prevent violations of the final rule in the advertisements the adviser disseminates. Examples of objective and testable means could include, but are not limited to, conducting an internal pre-review and approval of advertisements, reviewing a sample of advertisements based on risk, or pre-approving templates.
- Substantiation Requirement. The staff will review whether advisers have a reasonable basis for believing they will be able to substantiate material statements of fact in advertisements. The Marketing Rule prohibits advertisements that “[i]nclude a material statement of fact that the adviser does not have a reasonable basis for believing it will be able to substantiate upon demand by the Commission.” In the Marketing Rule Adopting Release, the Commission stated “[a]dvisers would be able to demonstrate this reasonable belief in a number of ways. For example, they could make a record contemporaneous with the advertisement demonstrating the basis for their belief.
- Performance Advertising Requirements The staff will review whether advisers are in compliance with performance advertising requirements in the Marketing Rule, including the prohibitions on including the following in an advertisement:
- Gross performance, unless the advertisement also presents net performance;
- Performance results, unless they are provided for specific time periods (not applicable to the performance of private funds);
- Any statement that the Commission has approved or reviewed the performance results;
- To the extent an advertisement includes the performance of portfolios other than the portfolio being advertised, performance results from fewer than all portfolios with substantially similar investment policies, objectives, and strategies as the portfolio being offered in the advertisement, with limited exceptions;
- Performance results of a subset of investments extracted from a portfolio, unless the advertisement provides, or offers to provide promptly, the performance results of the total portfolio;
- Hypothetical performance, unless the adviser adopts and implements policies and procedures reasonably designed to ensure that the performance is relevant to the likely financial situation and investment objectives of the intended audience and the adviser provides certain additional information; and
- Predecessor performance, unless the personnel primarily responsible for achieving the prior performance manage accounts at the advertising adviser and the accounts that were managed by those personnel at the predecessor adviser are sufficiently similar to the accounts that they manage at the advertising adviser. In addition, the advertising adviser must include all relevant disclosures clearly and prominently in the advertisement
- Books and Records In connection with the Marketing Rule, the Commission adopted amendments to the Books and Records Rule. The staff will review for compliance with these requirements. In addition, the Commission amended Form ADV to require advisers to provide additional information regarding their marketing practices. The staff reminds advisers of their obligations to accurately complete these questions in their next annual Form ADV amendment.
The Division of Examinations encourages advisers to reflect upon their own practices, policies, and procedures and to implement any appropriate modifications to their training, supervisory, oversight, and compliance programs.
10. On September 15, 2022, the SEC charged Asset Management Group of Bank of Hawaii, Canaan Management, LLC, Highland Capital Partners LLC and StarVest Management, Inc., for violating the SEC’s pay-to-play rule for investment advisers. The SEC found that each firm violated the rule by continuing to receive investment advisory fees from government entities following campaign contributions made by associates to elected officials or candidates for elected office. According to the SEC’s orders, the four investment advisers violated the pay-to-play rule by continuing to receive compensation from government entities within two years after campaign contributions to elected officials or candidates for elected office who had influence over the selection of investment advisers for advisory services for government entities (or who could appoint someone who had such influence). The parties consented to a cease-and-desist order and to a censure and agreed to pay civil money penalties in the following amounts: Asset Management Group of Bank of Hawaii ($45,000), Canaan Management, LLC ($95,000), Highland Capital Partners LLC ($95,000) and StarVest Management, Inc. ($70,000). https://www.sec.gov/enforce/ia-6126-s
11. On September 15, 2022, the SEC instituted administrative proceedings against TBG Holdings Corporation (“TBG”). TBG acted as an unregistered broker or dealer while selling the securities of MediXall. At all relevant times, TBG was not registered as or associated with a registered broker-dealer. Respondent participated in an offering of MediXall stock, which is a penny stock. TBG and its unregistered sales agents solicited investors nationwide to purchase shares of MediXall stock. TBG directed its sales agents to solicit investors using sales presentations, advise investors about the merits of the investments, and paid sales agents transaction-based compensation for sales of MediXall stock. TBG was barred. https://www.sec.gov/litigation/admin/2022/34-95815.pdf
12. On September 15, 2022, the SEC instituted administrative proceedings against Arthur Hoffman. While an associated person of a registered investment adviser and registered broker-dealer firm, Hoffman defrauded eight clients by failing to disclose compensation he received from a private issuer while recommending the issuer’s securities to those clients and in at least one instance, misrepresenting the extent of the compensation he received from the issuer. Hoffman also took steps to conceal his misconduct from his associated firm’s supervision and to mislead his clients about that firm’s role in supervising his recommendations. Hoffman’s deception led clients to invest a total of more than $650,000 with the private issuer, and that clients lost over $610,000 as a result of those investments. Hoffman was barred. https://www.sec.gov/litigation/admin/2022/34-95779.pdf
13. On September 14, 2022, the SEC instituted administrative proceedings against Buckman Advisory Group, LLC (“BAG”), a SEC register investment adviser, and Harry Buckman, Jr. (“Buckman”), a co-owner of the holding company that owns BAG. Buckman was the direct supervisor of Scott Adam Brander (“Brander”), a BAG investment adviser representative, for a number of years. He is also an investment adviser representative of BAG. Brander engaged in a fraudulent “cherry-picking” scheme, disproportionately investment allocating profitable trades to himself and unprofitable trades to the accounts of certain clients (the “Disfavored Accounts” and “Disfavored Clients”). Brander also often used shares of highly-leveraged and risky exchange traded funds (“ETFs”) in his cherry-picking scheme, without performing any analysis to determine whether these ETFs were suitable for the affected clients, all of whom were seeking more conservative investments. BAG failed to implement policies and procedures reasonably designed to prevent violations of the Advisers Act and its rules, and it failed reasonably to supervise Brander. In particular, it failed to conduct effective reviews of Brander’s activities, even when those reviews were mandated by its own written compliance manual, and it failed to enforce as to Brander its own requirement that trade allocations be submitted at the same time trade orders were placed. In addition, BAG’s Form ADV included statements about its practices and procedures that were false or misleading in light of the Firm’s compliance and supervision failures. Until December 2015, under BAG’s policies and procedures, Buckman, in his CIO role, was responsible for monitoring BAG’s compliance with clients’ investment parameters and for reviewing trades and limited investment opportunity allocations, to ensure that no client account was systematically disadvantaged. In addition, from 2013 to 2017, in BAG’s Forms ADV Part 2A, the Firm disclosed that Buckman, or a compliance officer who reported directly to Buckman, was responsible for reviewing client accounts for compliance with clients’ investment goals and risk tolerance levels. Buckman failed to effectively carry out these responsibilities. Buckman allowed Brander to create portfolios for his clients that differed from the pre-approved portfolios that other BAG investment adviser representatives were required to use and was on notice that Brander did not always allocate trades at the time orders were placed, and he failed to implement policies and procedures reasonably designed to prevent Advisers Act violations associated with Brander’s misconduct. He also failed reasonably to supervise Brander. BAG agreed to pay a civil money penalty in the amount of $400,000. Buckman agreed to pay a civil money penalty in the amount of $75,000. https://www.sec.gov/litigation/admin/2022/34-95747.pdf
14. On September 14, 2022, the SEC instituted administrative proceedings against Loop Capital Markets, LLC (“Loop Capital”), a registered broker-dealer. Beginning in September 2017 and continuing through February 2019, Loop Capital provided advice to a municipal entity regarding the investment of municipal securities proceeds. During this period, Loop Capital was not registered as a municipal advisor, and was not subject to any exemptions or exclusions from registration while providing advice to the municipal entity regarding the investment of municipal proceeds. In addition, Loop Capital failed to reasonably supervise the conduct of the municipal securities activities of its associated persons for compliance with Section 15B(a)(1)(B) of the Exchange Act. https://www.sec.gov/litigation/admin/2022/34-95764.pdf
15. On September 12, 2022, the SEC instituted administrative proceedings against California-based investment advisers SparkLabs Management, LLC and SparkLabs Global Ventures Management, LLC, and Bernard Moon (a principal of both entities), for making inter-fund loans without having authorization to do so, disclosing the associated conflicts of interest, or determining whether the loans were in their clients’ best interests. SparkLabs Management, SparkLabs Global Ventures Management, and Moon directed certain venture capital funds they managed to make more than 50 loans totaling over $4.4 million to their affiliates and other funds under Respondents’ management. The order further finds that the governing documents for the funds did not authorize the loans to affiliates, and Respondents did not describe the potential or actual conflicts of interest associated with such loans. In addition, according to the order, Respondents did not undertake a process to determine whether the loans or the terms of those loans were in the best interests of the lending funds. SparkLabs Management and SparkLabs Global Ventures Management have agreed to a cease-and-desist order, a censure, and to pay, on a joint and several basis, a civil penalty of $200,000. Moon has agreed, without admitting or denying the SEC’s findings, to a cease-and-desist order, a censure, and a civil penalty of $25,000. https://www.sec.gov/enforce/ia-6121-s
16. On September 12, 2022, the SEC announced fraud charges against former investment adviser representative Marc Frankel, who misappropriated client funds to pay his personal expenses. Frankel stole more than $743,000 from two clients, including a Major League Baseball player. Frankel used their funds to pay personal charges on a credit card in the name of his deceased mother. Those charges included sports tickets, college tuition for Frankel’s children, travel, jewelry, and electronics. Frankel made several small payments each month in order to evade detection and took other steps to conceal the fraud, such as falsely claiming that the payments were for a credit card held by the baseball player’s personal assistant. The matter is being litigated. https://www.sec.gov/litigation/litreleases/2022/lr25503.htm
17.On September 12, 2022, the SEC announced charges against registered investment advisers Hudson Advisors L.P. and Lone Star Global Acquisitions Ltd. for including Hudson’s owner’s anticipated income tax liability as a component of certain fees charged to 14 private equity funds they managed. Hudson included $54.6 million of its owner’s anticipated U.S. tax liability in fees charged to the funds. These tax liabilities were payable by the owner rather than by Hudson. Hudson and Lone Star Global never disclosed the inclusion of these tax liabilities to their clients. Hudson and Lone Star Global were not authorized to charge this fee component without full and fair disclosure to the funds. Hudson and Lone Star Global failed to implement appropriate policies and procedures in connection with conflicts of interest and disclosure of fees charged to advisory clients. Hudson and Lone Star Global have agreed to pay $11.2 million in civil penalties and have reimbursed the affected funds $68.5 million, which includes interest on the undisclosed tax liability charges. https://www.sec.gov/news/press-release/2022-159
18. On September 9, 2022, the SEC announced charges against BiscayneAmericas Advisers L.L.C., Garrison Investment Group, LP, Janus Henderson Investors US LLC, Lend Academy Investments, LLC, Polaris Equity Management, Inc., QVR, LLC, Ridgeview Asset Management Partners, LLC, Steward Capital Management, Inc., and Titan Fund Management, LLC who failed to comply with requirements relating to safekeeping client assets and/or to timely update their SEC disclosures to reflect the status of audits of financial statements for the private funds they advised. The SEC stated that firms are strongly encouraged to ensure their compliance with the Custody Rule and the related Form ADV reporting and amending obligations. In particular, private fund advisers registered with the SEC are reminded that per the instructions to Form ADV, Part 1A, Schedule D, Section 7.B.23.(h), “If you check ‘Report Not Yet Received,’ you must promptly file an amendment to your Form ADV to update your response when the report is available. The advisers, all of which agreed to settle the SEC’s charges, paid combined penalties of over $1 million. https://www.sec.gov/news/press-release/2022-156
19. On September 8, 2022,the SEC announced charges against NPA Asset Management, LLC (“NPA”), a registered investment adviser based in New Jersey, concerning NPA’s failure to monitor client accounts, improper principal trading activity, and related compliance failures. NPA maintained fee-based advisory accounts without monitoring for account suitability. The order finds that NPA’s failure to monitor client accounts was not only contrary to representations NPA made in its Form ADV Brochures that the firm would monitor accounts for, among other things, suitability and inactivity, but was also a breach of the firm’s duty of care. The order further finds that following NPA’s receipt of a deficiency letter from the SEC’s Division of Examinations, the firm adopted a suitability policy that, among other things, included an obligation to monitor for inactive accounts, which NPA defined as accounts with five or fewer transactions over an 18-month period. Applying that metric to the period April 2017 through December 2019 demonstrated that hundreds of accounts would have been deemed inactive as defined by NPA’s new suitability policy. The order also finds that NPA failed to implement this policy in a manner reasonably designed to prevent violations of the Advisers Act and the rules thereunder. For example, NPA failed to consider whether certain advisory clients would be better off in brokerage accounts, as required by the policy. Separately, according to the SEC’s order, from April 2017 through December 2021, NPA engaged in approximately 378 principal trades without providing clients with advance written disclosure or obtaining client consent for the trades, as required by the Advisers Act. Section 203 of the Advisers Act prohibits an investment adviser, while acting as a principal for its own account, from knowingly selling any security to or purchasing any security from any client without providing advance written notice of the adviser’s principal capacity and obtaining the client’s consent thereto. The order also finds that NPA failed to adopt and implement policies and procedures concerning principal trades and the accuracy of its client disclosures. NPA consented to a cease-and-desist order, a censure, disgorgement of $367,874.12 plus prejudgment interest, and a $300,000 civil penalty. https://www.sec.gov/enforce/ia-6110-s
20. On September 8, 2022, the SEC announced charges against Charles Pratt & Company, LLC, a SEC registered investment adviser, for violating rules designed to protect advisory clients from the misuse or misappropriation of their assets. Registered investment advisers that have custody of client assets are subject to the “custody rule,” which requires the advisers to undergo an annual surprise examination to verify the existence of assets or, where permissible, to distribute to investors, within 120 days of each fiscal year’s end, annual audited financial statements for the fund prepared in accordance with Generally Accepted Accounting Principles. Pratt & Co. failed to timely distribute the required annual audited financial statements for each year from 2010 through 2020 for one private fund that it advised. In addition, for each year from 2010 through 2020, Pratt & Co. failed to obtain the requisite independent verification of client assets from an independent public accountant for discretionary client accounts that it advised. Pratt & Co. also failed to adopt and implement written policies and procedures reasonably designed to prevent custody rule violations. Pratt & Co. consented to a cease-and-desist order and a censure, and agreed to pay a civil penalty of $100,000. https://www.sec.gov/litigation/admin/2022/ia-6107.pdf
21. On September 6, 2022, the SEC charged New York-based investment adviser Perceptive Advisors LLC (“Perceptive”) with failing to disclose conflicts of interest regarding its personnel’s ownership of sponsors of special purpose acquisition companies (SPACs) into which Perceptive advised its clients to invest. Perceptive formed multiple SPACs whose sponsors were owned both by Perceptive personnel and by a private fund that Perceptive advised. The Perceptive personnel were entitled to a portion of the compensation the SPAC sponsors received upon completion of the SPACs’ business combinations. The SEC’s order finds that Perceptive repeatedly invested assets of a private fund it advised in certain transactions that helped complete the SPACs’ business combinations and did not timely disclose these conflicts. Without admitting or denying the findings, Perceptive agreed to a cease-and-desist order, a censure, and a $1.5 million penalty to settle the charges. https://www.sec.gov/news/press-release/2022-155
22. On September 2, 2022, the SEC charged Energy Innovation Capital Management, LLC (“EIC”), a California-based exempt reporting adviser, with charging excess management fees from two venture capital funds. EIC’s limited partnership agreements for the two venture capital funds allow it to charge management fees during certain times based on the funds’ invested capital in individual portfolio company securities, and require EIC to reduce the basis for these fees if certain events occur, such as write-downs of such securities. EIC has returned $678,681 plus interest to the funds and their limited partners, and has agreed to settle the SEC’s charges by paying a $175,000 penalty. https://www.sec.gov/news/press-release/2022-154
23. On September 9, 2022, the SEC filed charges against Ramas Capital Management, LLC (“RCM”), a Texas-based investment adviser, and Ganesh Betanabhatla, its managing partner for alleged misrepresentations and breaches of fiduciary duty to a privately-managed fund and its sole investor. RCM and Betanabhatla made various misrepresentations and misused the fund assets. The defendants falsely told the sole fund investor that they had already raised $25 million for the fund, that a well-known and respected energy investor identified by name was involved in the fund and supported the investment and that the fund was a special purpose vehicle solely set up to invest in a specific portfolio company. The complaint alleges that there were no other investors in the fund, the respected energy investor was not involved and after receiving the investor’s $1 million, the defendants did not make any investment in the portfolio company and instead transferred most of that money to a completely different portfolio company related to one of RCM’s earlier private investment funds. The matter is being litigated. https://www.sec.gov/litigation/litreleases/2022/lr25494.htm
24. On September 6, 2022, the SEC filed charges against Aventura Capital Management, LLC, a Florida-based registered investment adviser, for breaches of fiduciary duty arising from its affiliate’s receipt of fees from Aventura Capital’s advisory clients’ investments. Aventura Capital failed adequately to disclose its mutual fund share class selection practices and the resulting conflicts of interest to its advisory clients. Aventura Capital selected share classes that paid fees to its affiliate, registered broker-dealer Aventura Securities, LLC, pursuant to Rule 12b-1 under the Investment Company Act of 1940 (“12b-1 fees”) instead of available lower-cost share classes of the same funds that did not charge those fees. As set forth in the order, although eligible to do so, Aventura Capital did not self-report its affiliate’s receipt of 12b-1 fees to the Commission pursuant to the Division of Enforcement’s Share Class Selection Disclosure Initiative. The order similarly finds that Aventura Capital failed to disclose that it selected higher-cost share classes of money market funds used as cash sweep vehicles for advisory clients, which also paid compensation to Aventura Securities, instead of available lower-cost share classes of the same funds that did not. Moreover, the order finds that Aventura Capital engaged in securities transactions with its clients on a principal basis through Aventura Securities, for which Aventura Securities received mark-ups and mark-downs as compensation. However, Aventura Capital did not provide prior written disclosure to, or obtain consent from, its clients in advance of each transaction, according to the order. Last, the order finds that Aventura Capital failed to adopt and implement written compliance policies and procedures reasonably designed to prevent these violations. Aventura Capital consented to a cease-and-desist order and a censure, and agreed to pay disgorgement of $623,324 plus prejudgment interest of $90,432 and a civil penalty of $225,000. https://www.sec.gov/litigation/admin/2022/ia-6103.pdf
25. On September 6, 2022, the SEC filed charges against Energy Innovation Capital Management, LLC (“EIC”), an exempt reporting adviser. EIC provides investment advisory services to EIC Fund I, LP (“Fund I”) and EIC Parallel Fund, LP (“Parallel Fund”) (collectively, the “Funds”). The Limited Partnership Agreements (“LPAs”) for the Funds provide that EIC may charge Fund I and the Parallel Fund management fees during the Funds’ post-commitment periods equal to two percent (2%) per annum for Fund I and one and one-half percent (1.5%) per annum for the Parallel Fund of the total invested capital contributions, but that the basis of the Funds’ respective management fees shall be reduced for investments that have been the subject of a “Disposition” during the post-commitment periods (beginning January 16, 2020). The LPAs define a Disposition to include, among other things, any write-down in value of individual portfolio company securities. From January 16, 2020 through March 31, 2022 (the “Relevant Period”), EIC made four errors in calculating the management fee resulting in EIC charging the Funds fees in excess of what was provided for in their respective LPAs. In particular, EIC (1) failed to make adjustments to its management fee calculations to account for portfolio company securities subject to certain Dispositions as defined by the LPA; (2) calculated its management fee based on aggregated invested capital at the portfolio company level instead of at the individual portfolio company security level; (3) incorrectly included accrued, but unpaid interest as part of the basis of the management fee calculation; and (4) did not begin calculating the Funds’ post commitment period management fees on January 16, 2020. EIC’s failures caused the Funds and, ultimately, their LPs to pay $678,681 more in management fees than they should have paid. EIC agreed to pay civil penalties of $175,000.00. https://www.sec.gov/litigation/admin/2022/ia-6104.pdf