A private fund manager that the SEC accused of not acting in a timely fashion on multiple examination findings was taken to federal court by the agency, which charged him with, among other things, engaging in conflicted transactions and misleading investors. The manager, Louis Mohlman, Jr. and his two advisory firms reached a settlement with the SEC the same day.
Advisers managing hedge funds, to a large extent, face many of the same issues that advisers managing other funds do. Requirements regarding fees and expenses, custody, books and records and more must be met. There are other compliance issues, however, where the SEC can be expected to pay particular attention to hedge funds - and managing advisers would be wise to make sure they are on top of them.
Dont promise what you cant deliver, dont overvalue investments and dont take from Peter to pay Paul. Those seem to be the main lessons drawn from a federal courts judgment against a hedge fund manager that the SEC has litigated against for the past seven years.
The SEC is long past the day of being unfamiliar with private fund advisers. It knows what to look for when it investigates and isnt shy about enforcement actions. When it finds a situation where the owner of the advisory firm is also the chief compliance officer, dont be surprised if it makes an example of the case.
Private fund advisers specializing in real estate transactions need to beware. Steer clear of conflicts of interest when selling property from one client fund to another. Disclosure must be your watchword and favoritism cannot be shown to either fund, regardless of your firms percentage of ownership in each.
If your private funds offering documents state that your fund will invest only in real estate, be aware that those are not just words. Stepping outside the parameters of your funds stated investment strategy may lead to trouble, both for the fund and for the fund manager. This is also true with unclear and/or inconsistent investment strategy wording between your private placement memorandum and other fund documents. Language, it turns out, matters.
Disclosure of conflicts of interest has long been a priority for the SEC in its policing of financial service firms. So when the agency conducted an examination of a public equity fund adviser in 2014 and found what it believed to be potential conflicts of interest that were not disclosed, it mounted an enforcement action that resulted in a settlement.
The SECs enforcement activities against private fund advisers apparently are not limited to those that registered with the agency. Consider the case of Chicago-based Augustine Capital Management, which, along with two of its three owners, was recently charged by the SEC with a myriad of allegations, including failure to disclose conflicted transactions to investors.
Failure to detect insider trading may result in consequences as serious as those for insider trading itself. Just ask this hedge fund manager.