Fund Administrator Accepts Deferred Prosecution Agreement for Turning in Client
The SEC announced the entry of a deferred prosecution agreement against a hedge fund administrator that provided information leading to an enforcement action against his hedge fund client. The DPA states that the administrator knew or was reckless in knowing that his client misappropriated assets, misstated NAVs, and delivered overstated account statements. The administrator raised the issues and tried to resolve them but ultimately resigned. He then went to the SEC and provided information about the misconduct in exchange for the deferred prosecution agreement. The DPA charges the administrator with aiding and abetting the securities law violations, bars him from the industry, and requires $50,000 disgorgement.
OUR TAKE: This case raises several concerns for fund service providers. When does a witness to a fraud become an aider and abettor? Is it letting it go for too long a period of time (how long?) or some more active participation? What does “know or should have known” mean in this context? Should potential whistleblowers consider the possibility that the SEC may turn on them? Is this how the SEC will transform fund service providers into the “gatekeepers” of the industry?