Fund Executive to Pay $2.1 Million for Opaque Trading Practices
The principal of a private fund manager agreed to pay over $2.1 Million in disgorgement, interest and penalties for failing to fully inform investors about an internal investment opportunity policy that significantly favored a fund in which the principal had a significant economic interest. The SEC maintains that the firm managed a large hedge fund alongside a small opportunistic fund but told investors that the trading strategies would not overlap. However, the firm, controlled by the principal, maintained an internal policy of allocating 1/3 of all new issue opportunities to the small fund and 2/3 to the large fund even though the small fund was 1/20th of the size of the large fund. The SEC asserts that the principal benefited because he owned approximately 20% of the small fund through a family trust. The SEC faults the firm for continuing to create an impression that the trading strategies did not overlap.
OUR TAKE: Firms that engage in multiple product lines must re-consider their trade opportunity and aggregation policies. Even non-intentional favoritism of one client over another will raise the regulatory eyebrows.