| Americas | Articles
The SEC announced settled charges against a Maryland-based private fund manager and its founder and owner for misusing over $1 million of private fund assets. The charges stemmed from fraudulent expense reports and personal use of private fund assets.
The more interesting and potentially relatable situation relates to the submission of fraudulent expense reports.
According to the SEC, for a period of four years the founder submitted false travel expenses for reimbursement, which the adviser improperly expensed to the fund. The travel expenses were primarily incurred for business trips by the founder to India.
The LPA permitted the travel expenses be reimbursed by the fund. However, the founder engaged in the practice of booking refundable business class tickets while also booking a “substantially less expensive” non-refundable business class airline ticket. He then cancelled the refundable airline ticket and travelled on the non-refundable one while submitting reimbursement for the more expensive airline ticket. The founder retained the difference in from the refund. The SEC cease and desist order states he received $44,092 in excessive travel reimbursements.
The founder reimbursed the fund plus interest and the adviser disclosed the charges in the fund’s audited financial statements.
Additionally, the founder borrowed $1 million in cash from the fund to settle a trade in his personal account in India. He owned a personal investment in a derivative instrument in India that was going to expire. To preserve the value of the investment he sought to purchase the underlying shares from the counterparty before the expiration. He also tried to transfer required funds from his firm’s account in the US, but an error occurred. The founder then decided to borrow the $1 million in cash from the fund’s account against the advice of three firm employees. He returned the money to the fund in five days and the adviser disclosed the loan in the fund’s audited financial statements.
The SEC charged the Adviser and Founder with multiple wilful violations of Section 206 of the Advisers Act which prohibits fraudulent and deceptive practices.
How we can help
Now more than ever, firms have a duty to protect their investors/customers. We offer a number of related services to make sure you have everything in place.
- Design and review policies and procedures
- Mock SEC exam
- Targeted testing of compliance policies and procedures
We can also advise on a broad range of other regulatory issues. Get in touch to find out more.
