Hedge Fund Founder/Owner Charged with Failure to Supervise PMs
The SEC has instituted enforcement proceedings against the founder/owner of a hedge fund firm for failing to reasonably supervise two employees criminally charged with insider trading. The SEC alleges that the respondent received “highly suspicious information that should have caused any reasonable hedge fund manager…to take prompt action.” According to the SEC, the respondent received red flags that his portfolio managers may have had material nonpublic information. The SEC says that evidence indicates that the respondent questioned whether an information source had inside information and then traded consistent with that information. In a separate instance, the SEC accuses the respondent of making trades based on an e-mail stating that certain earnings information came from “someone at the [subject] company.”
OUR TAKE: The SEC has a much easier job proving failure to supervise than proving all the elements of insider trading. However, the SEC will have to show a duty to supervise during the period in question when the respondent’s firm was not registered under the Adviser Act. This case should concern the principals of any investment management firm because it targets firm principals for the actions of employees.