Fund Sponsor Sued for Failing to be Specific about Investing Risks
The SEC has sued a private fund manager for misleading investors about the funds’ risks as well as assets under management and the fund manager’s work experience. The funds invested in IO and inverse IO tranches of agency CMOs. The SEC, asserting that these tranches represented the most risky securities issued by a CMO, claims that the fund manager misled investors by claiming that the funds invested in “safe” and “secure” government-backed bonds. The PPMs included some generalized disclosure about investing in CMOs. The SEC also alleges that the fund manager misrepresented his work experience and background and lied about performance and assets under management. The fund manager marketed his funds widely including through a radio show, radio advertisements, and written promotional materials.
OUR TAKE: Securities lawyers should consider this case when drafting disclosure documents. It does not help to use canned disclosure that doesn’t address the investing specifics. Fund managers should also remember that disclosure documents are necessary to limit liability and should not be considered marketing documents.