Hedge Fund Sponsor Liable for Sub-Adviser’s Fraud, SEC Argues
The SEC is seeking injunctive relief against a hedge fund sponsor that it alleges violated the anti-fraud rules by recklessly relying on performance and account information provided by the sub-adviser/portfolio manager. According to the SEC complaint, the sub-adviser/portfolio manager provided inflated returns and account balances, but the fund sponsor did not take any action to check the values even after refusals to submit information to the funds’ auditors. The SEC claims that the fund sponsor violated the anti-fraud rules because the PPMs stated that the fund sponsor controlled all investment and trading activities.
OUR TAKE: The SEC and the courts continue to draw the liability lines with respect to responsibility for fraud. In this case, the SEC argues that a fund sponsor cannot claim to be a victim of a sub-adviser’s fraud especially where the disclosure documents indicate that the fund sponsor has responsibility. The complaint does not allege that the fund sponsor had actual knowledge of the fraud, only that it was reckless in not verifying the numbers.