Enforcement

SEC Fines Adviser Who Obtained Misleading Morningstar Rating

March 16, 2018 | Elizabeth Dalziel

On February 26, 2018, the Securities and Exchange Commission issued an Order Making Findings and Imposing Remedial Sanctions and a Cease-and-Desist Order against EquityStar Capital Management, LLC, an unregistered investment adviser, and its owner, Steven Zoernack. According to the SEC’s Order, EquityStar and Zoernack offered and sold investment interests in two unregistered investment funds from about May 2010 to about March 2014. The SEC’s Order alleges that in the course of making these offers and sales, EquityStar and Zoernack “made material misrepresentations and omissions and engaged in a fraudulent scheme involving this and other deceptive conduct.”

Zoernack was tasked with writing and publishing marketing materials for the funds that EquityStar managed. In these marketing materials, Zoernack allegedly claimed that the funds’ manager, whose name was not disclosed, had “an impeccable and unblemished past record with the SEC.” According to the SEC, however, Zoernack was in fact the manager, and he had “two criminal fraud convictions, had previously filed for bankruptcy, and had numerous money judgments and liens against him.” The Order also claims that Zoernack made various efforts to hide his criminal record and negative financial history, including paying a search-engine manipulator to make positive information about him appear before negative information in search engine results. Continue reading ›

SEC Settles Charges with Investment Adviser for Unauthorized Allocation of Expenses

November 10, 2017 | Elizabeth Dalziel

In August of this year, the Securities and Exchange Commission (“SEC”) issued an Order Instituting Cease-and-Desist Proceedings (“Order”) against Capital Dynamics, Inc. (“CDI”), a New York-based investment adviser. The SEC alleged that from March 2011 to July 2015, CDI allocated certain expenses to private funds it was advising when the funds’ governing documents did not authorize the funds to pay these expenses. CDI submitted an Offer of Settlement in conjunction with the Order.

According to the SEC’s complaint, CDI and its affiliates formed the private funds, collectively known as the “Solar Fund,” “to introduce a new investment program focused on clean energy and infrastructure.” The documents that governed the funds provided that CDI and the funds’ general partners were obligated to pay “normal operating expenses,” such as employee expenditures and fees for specified services. They could not charge these expenses to the funds. Continue reading ›

Investment Adviser Settles Charges of Failure to Disclose Conflicts of Interest

September 4, 2015 | Steve Parker

Last month, the Securities and Exchange Commission (SEC) announced that registered investment adviser Guggenheim Partners Investment Management, LLC had consented to settle charges that it breached its fiduciary duty to its clients in connection with a $50 million loan made by a client to one of Guggenheim’s senior executives. Specifically, Guggenheim failed to disclose the existence of the loan and the conflicts of interests created by the loan, to its clients. Guggenheim agreed to pay a total of $20 million dollars to settle the charges.

According to the order instituting the administrative proceeding, the senior executive borrowed the funds from an advisory client so that he could make a personal investment in another corporation that was being acquired by Guggenheim’s parent company. The client who made the loan was one of several advisory clients of Guggenheim that invested, at Guggenheim’s recommendation, in two unrelated transactions. The client who made the loan, however, was permitted to invest in the unrelated transactions on different terms than the investors who had not made a loan to Guggenheim.
Continue reading ›

SEC Institutes Charges Against Fund Manager for Custody Rule Violations

November 3, 2014 | Steve Parker

The Securities and Exchange Commission announced last week that it has charged Sands Brothers Asset Management, LLC and three of its officers with violating the custody rule as it relates to firms who manage funds in which their clients invest. Investment advisers who have custody, as defined by Rule 20642, must engage in certain “safekeeping practices.” If the adviser has custody by virtue of any reason other than the mere authority to deduct client fees from advisory accounts, one of the safekeeping requirements is that of obtaining an independent audit of fund assets. In the case of a private fund, that requirement can be met by the employment of an auditor approved by the Public Company Accounting Oversight Board who audits and reports to shareholders, (i.e., investors in the funds), annually and reports to shareholders within 120 days from the end of the fiscal year.

In its recent enforcement action, the SEC enforcement division alleged that Sands Brothers had been late in providing investors with audited financial statements. According to the Order instituting administrative proceeding, Sands Brothers was 40 or more days late in distributing the financial statements for ten different private funds for the fiscal year 2010. In the following year, the financial statements for those same funds were between six and eight months past due. In 2012, the financial statements for those funds were distributed approximately 90 days late.
Continue reading ›