RIA Sanctioned for Ignoring Due Diligence Red Flags
A registered investment adviser agreed to sanctions and fines for failing to heed red flags when conducting due diligence on an investment that turned out to be a Ponzi scheme. The RIA told clients he conducted due diligence and, in fact, made several inquiries and document requests. However, the “feeder fund” that served as a conduit for the Ponzi scheme refused to deliver financials or any hard information about the investments. Relying on e-mails about performance, the RIA decided to invest both his clients’ and his own money, which was lost when the Ponzi scheme was uncovered. The SEC charges that the RIA violated the Advisers Act’s anti-fraud prohibitions by failing to disclose that the due diligence process “had been thwarted.”
OUR TAKE: The SEC continues to target RIAs as the gatekeepers and co-conspirators in various Ponzi schemes. While this may appear to be a case of blaming the victim (especially since the respondent invested his own money), the SEC wants to leverage the RIAs to perform significant due diligence on unregistered funds.