The main street investor focus of SEC Enforcement has spawned a series of offering fraud cases. It has, at the same time, resulted in a series of actions involving investment advisers which has become one of the largest groups of cases brought by the Commission. This week the agency added to the number of those actions by naming another adviser in a fraud case for fraudulently inflating NAV. SEC v. TCA Fund Management Group Corp., Civil Action No. 1:20-cv-21964 (S.D. Fla. Filed May 11, 2020).
TCA is a registered investment adviser which has offices in New York, Las Vegas, London and Melbourne. TCA Global Credit Fund GP, Ltd., a Cayman firm , was also named as a defendant. That firm serves as the general partner of Master Fund and Feeder Fund.
TCA advises the funds. The Feeder Funds raise capital from investors. Those funds feed the Master Fund. It Provides investment banking services to small and medium sized firms. The adviser is compensated based on the amount of the Funds’ assets or NAV. The other entities involved are compensated based on the profitability of the Master Fund.
Over a nine-year period tracing to 2010, TCA has falsely inflated NAV and its compensation through two methods. First, fees paid to the Master Fund were prematurely recognized. When that Fund entered into a lending arrangement typically a term sheet was executed. Rather than waiting for the deal to close and the fees to be earned, TCA had Master Fund recognize the fees at the time the term sheet was signed.
Second, over a three-year period, beginning in 2016, the adviser caused the Master Fund to prematurely recognize fees for investment banking services. Specifically, when an agreement for services was entered into TCA immediately recognized the fees as income despite the fact that little if any of the services had been provided.
Collectively, these practices left Master and Feeder Funds in difficult financial conditions. NAV had been falsely inflated by almost $160 million. In 2017 and 2018 the auditors issued a qualified opinion with respect to 89% of the Master Fund’s NAV. In January the Feeder Funds were forced to suspend redemptions. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). The case is pending.