Investment Adviser Charged With Misappropriating Client Funds

On February 2, 2017, the Securities and Exchange Commission (“SEC”) filed a complaint in the United States District Court for the District of Connecticut against Sentinel Growth Fund Management, LLC (“Sentinel”), an investment adviser, and its founder, Mark J. Varrachi (“Varrachi”).  The complaint alleges that from about December 2015 to November 2016, Varacchi and Sentinel stole $3.95 million or more from investment advisory clients.  The complaint asks that the District Court impose a permanent injunction against Varacchi and Sentinel, order them to disgorge any ill-gotten gains, and order them to pay civil penalties.

Neither Sentinel nor Varrachi was registered as an investment adviser with the SEC or with any state regulatory authority.  However, the SEC charged both of them with violations of the Investment Advisers Act of 1940 (“Advisers Act”).  The SEC found that Sentinel was “in the business of providing investment advice concerning securities for compensation,” which fits the definition of an investment adviser in Section 202(a)(11) of the Advisers Act.  As for Varrachi, the SEC determined that because he owned and managed Sentinel, he too was an investment adviser.  As a result of meeting the definition of an investment adviser, Sentinel and Varrachi were subject to the Advisers Act’s antifraud provisions.

The SEC found that beginning in 2013 and ending in 2016, Sentinel and Varrachi claimed that they would “offer investors a platform to invest with up-and-coming hedge-fund managers.”  To do this, they set up two private funds, Radar Alternative Fund LP and Radar Alternative Master Fund SPC (“the Funds”).  They provided to investors that they would assign the investors’ funds to various series in an overall master fund.  Finally, Sentinel and Varrachi told some investors, as well as some prospective investors, that their funds would be placed in various separate accounts and sub-advised by the hedge-fund managers, instead of being placed in a private fund.

The SEC, however, determined that Sentinel and Varrachi’s representations were false.  According to the SEC, Sentinel and Varrachi ensured investors that their funds would be placed in either the Funds or a separate account.  However, evidence shows that Sentinel and Varrachi received about $2.95 million worth of investor funds, and they never invested that money in either the Funds or a separate account. An additional $1 million was withdrawn from the Funds without investors’ permission.

Evidence shows that rather than investing investors’ funds in the Funds and other separate accounts as promised, Sentinel and Varrachi used the funds to pay personal and business expenses.  The expenditures made included a $1.1 million payment to a law firm that was representing Sentinel and Varrachi in a lawsuit brought by Varrachi’s former employer, $3.1 million to Varrachi’s personal bank accounts, $33,000 to Varrachi’s family members, and $425,000 to business associates of Varrachi.

To conceal the misappropriation of the funds, Sentinel and Varrachi deceived investors as to the state of and returns on investments that they supposedly oversaw.  For example, they set up balances in subaccounts that were “funded by margin borrowing.”  They also made it so that if investors wanted to inspect the status of their investments, they only had access to information from the subaccounts that supposedly held their investments.  Finally, the SEC found that in 2016, Varrachi tampered with the activity of a particular account to cover up a $1 million withdrawal.

As a result of Sentinel and Varrachi’s alleged fraudulent conduct, the SEC’s complaint demands that the District Court issue a permanent injunction that would prevent Sentinel and Varrachi from engaging in any further fraud.  The complaint also demands that Sentinel and Varrachi be obligated to disgorge any ill-gotten gains and losses avoided, plus interest.  Finally, the complaint requests that Sentinel and Varrachi be required to pay a civil monetary penalty.

Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including compliance with federal and state laws and rules. Please visit our website for more information.