Exempt Reporting Adviser Not Exempt from Securities Laws
The SEC accused an exempt reporting private adviser of securities fraud for misrepresenting the fund’s investment strategy, misappropriating assets, and failing to deliver audited financial statements.
Upon a break with his partner, the adviser’s principal shifted the fund’s investment strategy away from liquid options and preferred stocks, managed by his former partner, and into illiquid start-up and VC investments. The SEC accuses the adviser, who had a background in NASCAR racing, of failing to inform investors and continuing to misrepresent the investment strategy as highly liquid in the PPM and other investor communications. The SEC also charges the adviser with inflating valuations and account statements and concealing his fraud by failing to deliver audited financial statements, as promised in the disclosure documents. Ultimately, the fund filed for bankruptcy protection when suspicious investors try to redeem their illiquid assets.
Just because you are an exempt reporting adviser doesn’t mean you can violate the securities laws with impunity. You are still subject to all of the antifraud rules, which could also lead to criminal prosecution. Investors should be cautious about investing with unregistered advisers that are not subject to the same compliance requirements or SEC review as a registered adviser.
Read the full complaint here.