Hedge Fund Manager Cited for Taking Warrants as Compensation without Full Disclosure
A hedge fund manager and its principal were censured and fined for failing to disclose that the manager took warrants from the funds it managed without disclosing that the funds paid for the warrants. The funds obtained the warrants as part of a bundle of securities purchased in PIPE transactions. In the PPMs, the warrant-taking was described as compensation for due diligence and post-investment activities. The SEC charged that the adviser needed to specifically state that the funds paid for the warrants and that the manager took them from the fund without compensation. The SEC noted that the respondents failed to adequately enhance the disclosure even after a deficiency letter resulting from an exam noted the insufficient disclosure.
OUR TAKE: We question whether any amount of disclosure really would have protected the hedge fund manager. The SEC took issue with the hedge fund manager’s conflict of interest in taking the warrants. Fund managers should consider this action any time they consider taking securities as management compensation.