Adviser Tried to Conceal Loans to Parent Company

A mortgage loan adviser and its two principals agreed to pay over $9 Million in disgorgement, interest, and fines for using funds it managed to make loans to the parent of its affiliated advisers and then using straw man transactions in an attempt to conceal the loans.  The SEC maintains that the respondent funneled money to the parent company through undocumented, undisclosed, and unlawful loans made by two private funds and a registered closed-end fund.  The respondent then tried to repay the loans by laundering mortgage assets through a straw man that bought mortgage loans from one fund and then transferred them to another fund.  The misconduct was uncovered when discrepancies arose between the registered fund’s collection account and its custody account.  The SEC asserts that the respondent misled the Board and investors, thereby violating the anti fraud rules as well as the compliance rule.

OUR TAKE: Making the unauthorized loans was bad enough and would have resulted in breach of fiduciary duty charges.  Trying to conceal the loans through straw man transactions led to the fraud charges, which also could have carried criminal penalties if the U.S. Attorney decided to prosecute.