SEC Sues Adviser for Selling Risky Hedge Fund
The SEC commenced enforcement proceedings against a registered adviser and its two principals for making misleading statements to induce advisory clients to invest in a risky hedge fund. According to the SEC, one of the principals helped start the hedge fund run by a former employee with little securities law experience. However, the PPM described the portfolio manager as an experienced industry veteran with portfolio management experience. The SEC also alleges that the respondents and the PPM lied about risk monitoring and the trading algorithm employed. The fund ultimately collapsed as a result of investment management failures. The SEC charges multiple violations of the anti-fraud rules.
OUR TAKE: In this case, the respondent helped set up the hedge fund, which connects him to the misleading PPM. However, the SEC continues to explore adviser liability and responsibility to conduct due diligence into third party funds and their PPMs. FINRA already requires a suitability investigation into third party private funds. Perhaps, the SEC is moving in this direction.