SEC Charges Hedge Fund Manager for Charging Unlawful Research Expenses
The SEC has commenced enforcement proceedings against a hedge fund manager and its principals for funneling money to insiders by charging the funds false research expenses and misusing soft dollars. The SEC alleges that the defendants unjustly enriched themselves by more than $1 Million. The SEC asserts that the defendants (i) submitted research invoices for services never performed by an insider and such arrangement was not disclosed to investors and (ii) directed soft dollar payments to the same insider for the same phantom research. The SEC states that the insider actually worked in the same location as the fund manager and that the research invoices were intended to pay his salary, which was no permitted by the fund documents. Also, the SEC claims that the defendants increased trading velocity when they needed more funds, which increased soft dollar payments.
OUR TAKE: The SEC has warned that it will investigate any undisclosed payments from private funds that benefit advisers or fund sponsors. This case involves hedge funds, but the staff has also focused on private equity funds.