SEC Sues Fund-of-Funds Manager for Failing Due Diligence
The SEC filed a civil suit against a hedge fund-of-funds manager that it alleges did not conduct the due diligence on underlying funds that it purported to undertake in its marketing materials. The SEC charges that the defendants marketed an unregistered multi-strategy fund by touting its rigorous due diligence process including ensuring that the underlying funds utilized reputable service providers. However, despite this supposed process, the fund invested with at least 4 notorious Ponzi schemers including Bayou and Finvest. The SEC argues that the fund would not have made such investments if it had completed the promised due diligence.
OUR TAKE: Advisers and fund managers that invest client assets in other funds are practically subject to a â€œone strike and youâ€™re outâ€ standard. If you invest client assets in a Ponzi scheme, it will be hard to argue in retrospect that your due diligence was sufficient.