Hedge Fund Exec to Pay Nearly $3 Million for Principal Transaction with Fund
The principal of a hedge fund-of-funds agreed to pay nearly $3 Million in disgorgement, fines and penalties and to an industry ban for causing the fund he managed to purchase illiquid securities in which he had an undisclosed financial interest. According to the SEC, the respondent wanted to hire a person who had to divest certain illiquid holdings before joining the firm. The respondent caused the fund he managed to buy the securities. The SEC alleges that the principal also had an ownership interest in the same securities, but did not disclose the ownership interest to his firm or the fund’s Board. The SEC charges the respondent with engaging in an undisclosed principal transaction with a client in violation of Section 206 of the Advisers Act.
OUR TAKE: What’s most interesting about this case is that the SEC only charged the individual and not the firm, presumably because the firm had no knowledge of the respondent’s ownership interest. It is unclear whether an individual can have direct (instead of aiding and abetting) liability under Section 206, which applies to investment advisers, not investment adviser representatives. The SEC also did not indicate whether the respondent profited from the transaction.