SEC Sanctions Adviser For Failing To Identify Role in Transactions

Actions involving investment advisers are rapidly becoming a staple of SEC Enforcement. Many of those actions center on undisclosed conflicts such as the share class selection cases where the adviser elects to put clients into higher priced mutual fund shares which result in the payment of fees rather than the same shares where there are no fees without disclosing the fees paid. One recent Commission case in this area centered on the failure of the adviser to inform funds of the capacity it was acting in, that is, as an agent or a principal. In the Matter of Ophrys, LLC, Adm. Proc. File No. 3-18815 (Sept. 21, 2018).

Ophrys is a registered investment adviser. The firm manages 32 funds of regulated assets. Its primary business is advising funds that invest in portfolios of defaulted consumer receivables. In this regard in manages Candica, LLC, Lutea, LLC, Oak Harbor Capital V, LLC or OHCV, Oak Harbor Capital X, LLC or OHCX, Pallida, LLC and Vanda, LLC. Since its clients are not typically qualified debt buyers for purposes of acquiring portfolios of defaulted consumer debt, the adviser, in some instances, acquires the portfolio directly or through a subsidiary and later makes the debt available to one of the managed funds. As manager the firm is paid a management fee and an additional fee when it makes efforts to collect on receivables. It also typically is paid a carried interest equal to a percentage of all collections on the receivables net of expenses.

In three recent transactions the firm failed to identify the capacity in which it was acting in accord with the provisions of the Advisers Act. The first transaction took place in 2012. There Candice owned portfolios of consumer receivables. The portfolios were acquired with a loan secured by an interest in the receivables. Under the terms of the arrangement Ophrys would obtain a fee based on the percentage of the collections in addition to the advisory fee.

In December 2012 Ophrys caused Candica to sell a portion of the portfolio to Vanda, financed in part with capital contributions from OHCV. Ophrys was paid a fee related to the transfer of the interest. This constituted an agency transaction under Advisers Act section 206(3) since Ophrys acted as a broker. Nevertheless, the adviser failed to provide adequate written notice that it was acting as an agent on the transaction or to obtain consent.

Respondent entered into a similar arrangement in November 2013. There Ophrys caused OHCX to invest in Candica by purchasing securities issued by that firm. The deal was funded in part by contributions from OHCX. Again, this was an agency transaction because Respondent acted as a broker on behalf of Candica. Yet Respondent failed to obtain OHCX’s consent to the transaction.

In a third transaction Respondent failed to provide notice that it was acting as a principal. In December 2014 Ophrys acquired indirectly consumer receivables from Lutea. The securities were then sold to Pallida, another advisory client. The transaction was funded by a loan from OHCX to Pallida and secured by a security interest. Since Respondent was the adviser of Pallida and OHCX it was required to provide written disclosure of its role as principal and obtain consent. The adviser did not comply with this requirement. The Order alleges violations of Adviser Act section 206(3).

To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the section cited in the Order and to a censure. In addition, Ophrys will pay a penalty of $500,000.