SEC Sues Hedge Fund Manager for Conduct that Pre-Dated Registration

The SEC sued a large hedge fund manager and its principals for cutting undisclosed side deals with some of its largest investors in an effort to restrict redemptions by other investors. The SEC alleges that the defendants gave its largest investors preferential redemption rights in exchange for approving a shareholder proposal that would restrict an investor’s ability to redeem more than 25% of its interest. The side agreements included a forced redemption plan to take out certain dissenting shareholders, account aggregation to avoid gating thresholds, and an agreement to waive redemption notice provisions. The fund adviser registered with the SEC in March, although it managed the hedge funds for several prior years. The SEC alleges securities fraud as well as breach of fiduciary duty under the Advisers Act.