Alleged Ponzi-Schemers Concealed Financial Problems for Several Years
The SEC charged a private fund sponsor and its distributor for facilitating a Ponzi-like scheme that allegedly misled investors over several years with false marketing claims, failing to deliver audited financials, and neglecting to register. The SEC asserts that the defendants promised fixed returns with proceeds from portfolio companies but knowingly used other investors’ money to fund shortfalls. The defendants also failed to deliver audited financial statements (as required by the custody rule), which would have disclosed the cash shortfalls and other undisclosed fees. The SEC also charges the funds with failing to register under Section 12(g) of the Exchange Act because they had more than 2000 investors.
The laws are on the books to protect investors from this type of wrongdoing: prohibitions against misleading marketing, the requirement to deliver audited financial statements, and registration. Yet, these defendants allegedly ignored the laws without detection. How should the SEC ensure that registrants follow the laws? Require every adviser and broker-dealer to engage an independent compliance consultant to review the compliance policies and procedures and deliver an annual report to clients and investors.