Barred Securities Professional Charged By SEC
The Commission brought an action against a hedge fund operator who had previously been barred from the securities business and his son. The case centers on undisclosed conflicts and preferential withdrawal rights for the two individual defendants. SEC v. Conrad, Civil Action No. 1:16-cv-02572 (N.D. Ga. Filed July 15, 2016).
Thomas Conrad and his son Stuart were named as defendants in the action along with Financial Management Corporation and Financial Management Corporation, S.R.L. Thomas had been barred from association with any broker or dealer and the registration of his then broker-dealer firm revoked in a 1971 administrative proceeding which concluded that he was unfit for “engaging in the securities business in any capacity.” Financial Management acted as the general partner and unregistered investment adviser for the hedge funds operated by Mr. Conrad under the World Opportunity Fund name, including its successor, World Fund II. Financial Management Corp. assumed Financial Management’s role as the general partner and adviser to the World Opportunity feeder funds.
Mr. Conrad created at least four hedge funds, WOF, WOF Master, World Fund II and BVI. A master – feeder structure was used. Investors in the feeder funds received limited partnership interests in those funds. Currently WOF holds retirement assets and World Fund II has non-retirement assets. Each feeder invests 100% in WOF Master. As of November 2012 there were 44 limited partners invested in WOF which had a portfolio valued at $5.7 million. At the same time World Fund II had 48 limited partners with a portfolio valued at $5million. Mr. Conrad also created FMC and FMC Uruguay, which were the general partner for each fund and served as an unregistered investment adviser.
In January 2013 Mr. Conrad appointed himself a sub-adviser to WOF Master. His fee for serving in this capacity was a 1% per year management fee and a 0.18% administrative fee. These fees were not disclosed to investors and were paid in addition to those which were disclosed.
Mr. Conrad also did not fully disclose his background to investors. Investors were told that he had managed the investment portfolio of a non-profit organization since 1965, that he had held a seat on the Philadelphia-Baltimore-Washington Stock Exchange and were provided information on his work history, including at his broker-dealer. Investors were not told about the prior Commission order barring him from the securities business, the revocation of the broker-dealer’s registration and that he had been sanctioned by the exchange.
Investors also were not told about the transactions involving his family. Specifically, investors were not told that $18,000 was used to pay the credit cards of his daughter-in-law in return for a promise to pay, that investor funds were used to purchase two soybean farms in Uruguay by placing the title in the name of WOF Master, that his son used $26,500 to purchase a truck which was later repaid and that about $88,000 was used to purchase precious metals put in his name.
In November 2008 Mr. Conrad notified investors that FMC was temporarily suspending all withdrawals, redemptions and terminations of capital accounts in view of the market crisis. Requests to redeem all or part of their investments by 29 investors in 2012 were denied. Nevertheless, Mr. Conrad redeemed about $2 million in one transaction and received other payments. Son Stuart received payments in a number of transactions and redeemed $25,000 from the WOF Master account.
The complaint alleges violations of each subsection of Securities Act Section 17(a), Exchange Act Section (b) and Advisers Act Sections 206(1), 206(2) and 206(4). The action is pending. See Lit. Rel. No. 23597 (July 18, 2016).