SEC Complaint

Firm and CEO Settle Charges with SEC for Ponzi-like Plot Relating to Life Settlements

May 23, 2017 | Elizabeth Dalziel

On May 4, 2017, the Securities and Exchange Commission (“SEC”) reached a settlement with Verto Capital Management, LLC (“Verto”), a New Jersey-based life settlement firm, and its CEO, William Schantz III (“Schantz”). Verto and Schantz consented to pay the SEC about $4 million, which includes both disgorgement and a penalty, to settle claims that they used funds from new investors to pay older investors in a Ponzi-type manner. The SEC also alleged that Verto and Schantz diverted investor funds for Schantz’s personal use.

The settlement resulted from a complaint filed by the SEC in the United States District Court for the District of New Jersey alleging that between November 2013 and November 2015 Verto and Schantz issued about $12.5 million worth of nine-month 7% promissory notes to investors. Verto and Schantz claimed that the funds from these promissory notes would be used to purchase “life settlements,” which are life insurance policies that have been sold by their original owners to third-party buyers. The SEC’s complaint alleges that Verto and Schantz made a variety of misrepresentations in the sale of these promissory notes. Continue reading ›

SEC Charges Investment Adviser and his Advisory Firm with Making Fraudulent Misrepresentations to Prospective Investors and Clients

May 19, 2017 | Elizabeth Dalziel

On April 17, 2017, the Securities and Exchange Commission (“SEC”) filed a complaint in the United States District Court for the Southern District of New York against Justin D. Meadlin (“Meadlin”), an investment adviser, and Hyaline Capital Management, LLC (“Hyaline”), his advisory firm. The complaint alleges that Meadlin and Hyaline made fraudulent misrepresentations and omitted material facts in order to “induce clients, and prospective investors… to invest funds with them.” These actions caused them to be in violation of Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 (“Advisers Act”) and Rule 206(4)-8 under the Advisers Act.

The SEC’s complaint alleges that from September 2012 to April 2013, Meadlin sent emails that exaggerated the amount of Hyaline’s assets under management (“AUM”) to clients and prospective investors. These emails provided that Hyaline had AUM that ranged from $17.5 million to $25 million. In reality, however, Hyaline had only $5.5 million in AUM during the relevant time period. Meadlin also sent emails that contained false statements pertaining to expected AUM. Continue reading ›

Investment Adviser Charged With Misappropriating Client Funds

March 22, 2017 | Elizabeth Dalziel

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. Continue reading ›

SEC Charges Investment Advisory Firm and its Owner for Cherry-Picking Scheme

February 2, 2017 | Elizabeth Dalziel

On January 25, 2017, the Securities and Exchange Commission (“SEC”) filed a complaint in the District Court for the District of Massachusetts (“District Court”) against Strategic Capital Management, LLC (“SCM”), an investment advisory firm, and its owner, Michael J. Breton. The complaint alleges that Breton, through SCM, garnered about $1.3 million by defrauding clients using what is known as a “cherry-picking” scheme. The action follows a similar action brought by the SEC last October.

According to the SEC, cherry-picking occurs when an investment adviser “defrauds clients by purchasing stock and then waiting to see if the stock price goes up, or down, before deciding whether to keep the trades… or to put the trades into clients’ accounts.” Cherry-picking typically involves the investment adviser allocating more profitable trades to its own accounts and allocating less profitable ones to client accounts. It is a breach of fiduciary duty because it entails an investment adviser placing its interests above those of its clients.

The SEC’s complaint alleges that from about January 2010 through August 2016, Breton and SCM were investment advisers to numerous client accounts. Breton, through SCM, bought public companies’ securities using a block trading omnibus account known as a “Master Account.” Through this Master Account, Breton was permitted to make orders for both his personal accounts and his clients’ accounts.

Asset Management Company and its Owner Charged With Fraud

December 22, 2016 | Elizabeth Dalziel

On December 1, 2016, the Securities and Exchange Commission (“SEC”) announced that it had filed a complaint for injunctive and other relief in the United States District Court for the Southern District of Florida against Onix Capital LLC (“Onix Capital”), an asset management company, and its owner, a Chilean national by the name of Alberto Chang-Rajii (“Chang”). The complaint alleges that Onix Capital and Chang “violated the federal securities laws by fraudulently raising approximately $7.4 million from investors based on material misrepresentations regarding the investments offered, the use of the funds raised, and the background and financial success of Chang himself.”

Onix Capital was not an SEC-registered adviser, nor was Chang registered as an investment adviser or broker-dealer. However, the SEC alleged that Onix Capital and Chang violated the Investment Advisers Act of 1940 (“Advisers Act”). Specifically, the SEC alleged that Chang, “for compensation, engaged in the business of advising… investors… as to the value of securities or as to the advisability of investing in, purchasing, or selling securities,” and therefore met the definition of an “investment adviser” subject to the anti-fraud provisions of the Advisers Act. Continue reading ›

Quant Hedge Fund Halted by SEC Enforcement Action

November 29, 2011 | Steve Parker

The Securities and Exchange Commission (“SEC”) announced earlier this month that it obtained an asset freeze against a Boston-area money manager and his investment advisory firm who allegedly mislead advisers in a quantitative hedge fund and diverted a portion of investor money into his personal bank account.

In its allegations, the SEC claimed that Andrey C. Hicks and Locust Offshore Management, LLC made false representations to “create an aura of legitimacy when selecting individuals to invest in a purported million dollar hedge fund.” Hicks is alleged to have raised $1.7 million from several investors. According to the SEC’s complaint, Hicks misrepresented that he had obtained an undergraduate and graduate degree at Harvard University and that he previously worked for Barclays Capital. He also misrepresented that the hedge fund held more than $1.2 billion in assets, according to the complaint.

U.S. District Court Judge Richard Sterns of the District Court for Massachusetts issued the restraining order and asset freeze.
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