Hedge Fund Manager Charged with Concealing Liquidity Crisis
The SEC has commenced civil enforcement proceedings against a hedge fund sponsor and its principals for failing to notify investors of its liquidity crisis and using improper transactions to pay redeeming investors. The Department of Justice has brought parallel criminal charges. According to the SEC, the respondents reported positive returns that averaged 17% per annum from 2003-2015. Additionally, the respondents assured investors that they would pay all redemptions within 90 days. The SEC alleges the firm inflated valuation of investments including 2 oil production companies, looted certain portfolio companies to pay redemptions, unlawfully transferred assets, and lied to auditors. As redemptions accelerated and the liquidity crisis grew, the SEC asserts that the respondents misled current and prospective investors about the funds’ valuation, liquidity and prospects. Ultimately, the funds ceased redemptions by placing most assets in an illiquid side pocket.
OUR TAKE: Compliance officers and due diligence professionals should review this complaint as a primer on private fund management misconduct. Red flags included consistent high performance, subjective valuations, conflicted transactions, and misrepresentations to auditors.