HEDGE FUND MANAGER FINED AND BARRED FOR USING OFFSHORE FUND TO BOOST PERFORMANCE OF AFFILIATED HEDGE FUND
A hedge fund manager consented to the payment of nearly $200,000 in fines and penalties and a bar from the industry for using purchases by an offshore fund in a thinly traded stock to pump the performance of an affiliated hedge fund. As alleged by the SEC, the adviser, which managed both funds, caused the offshore fund to engage in significant quarter-end purchases of a thinly traded stock held by the domestic hedge fund in order to boost the hedge fund’s performance numbers as of the end of the quarter and thereby report better performance and take higher fees. The SEC alleged violations of the Advisers Act’s anti-fraud provisions for failing to disclose the cause of the boosted performance to investors and for purchasing the thinly-traded stock at “higher-than-necessary” prices.
OUR TAKE: Failing to tell investors that performance suddenly increased because of purchases made by an affiliated fund clearly violates the anti-fraud rules. We are somewhat troubled, however, by the SEC questioning the price that the adviser paid for purchasing a security. This case should be more about the motive of the adviser.