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.

OUR TAKE: This is an interesting test case in the wake of Dodd-Frank. The alleged conduct occurred well before the adviser registered in March 2012. The SEC will have an easier time proving an undisclosed conflict of interest that violated the Advisers Act than securities fraud. The charges against the principals are also easier under the Advisers Act. Unclear is how the courts will review prior conduct.

http://sec.gov/litigation/complaints/2012/comp-pr2012-122.pdf