Fund Administrator Pays for Client’s Fraud
A fund administrator agreed to pay over $560,000 to settle charges that it caused its client’s violations of the Advisers Act’s antifraud provisions. The client defrauded clients (and ultimately went to prison) for misappropriating client assets by creating fake loans in which the fund invested. The fund’s custodian declined to book the fake loans because they lacked sufficient backup documentation. Regardless, the administrator included the loans in the fund’s NAV even though, according to the SEC, it knew that the custodian excluded the loans. The SEC faults the administrator for failing to further investigate, notify the board or shareholders, or exclude the loans from the NAV calculation.
OUR TAKE: Although it may be a legal stretch to assert that a fund administrator caused a fraudulent client’s illegal conduct, the SEC will hold securities markets gatekeepers accountable for their client’s behavior. Service providers must conduct due diligence before accepting a client or risk being found guilty by association.