by T. GormanPosted on Posted in SECActions

It is axiomatic that investment advisers have a fiduciary duty to use investor funds entrusted to them for the benefit of the investors. The duty applies to registered and unregistered investment advisers. The Commission’s latest action involving an unregistered investment adviser charges that the adviser used investor money, as well as that of the firm which was the only asset of the managed investment Fund, for its benefit, not that of the clients. SEC v. Schrichte, Civil Action No. 16-5773 (E.D. PA. Filed Nov. 7, 2016).

Named as defendants are: NewMarket Technology Fund I, LLC, a Fund managed by NewMarket Global Management I, LLC. The Fund’s only asset is its interest in Software Company. Christopher Schriechte is a managing member of the Fund, president and a managing member of Global Management, and CEO of Software Company. Howard Hill is also a managing member of the Fund and Global Management as well as general counsel and secretary of Software Company.

Messrs. Schriechte and Hill created the Fund in 2001. It has about 75 investors who have invested $21 million. Global Management serves as its unregistered investment adviser. The Fund’s only asset is an investment in Software Company. That firm has not been profitable since 2007, the same year in which Messrs. Schriechte and Hill became executives of the firm. The two men control Global Management, the Fund and the Fund’s only asset.

Over a seven year period, beginning in 2007, Messrs. Schriechte and Hill used their control to take about $955,000 in loans from the Fund. The loans were interest free and did not have a corporate purpose. To the contrary, the money was diverted to their personal use. The loans were extended despite a provision in the operating agreement requiring the consent of the Fund’s investors which was not obtained. After the Commission’s investigation began the two men provided amended schedules for their notes and Mr. Schrichte began making repayments.

During the same period Messrs. Schriechte and Hill also took a total of $499,558 from the Fund and the Software Company. During the SEC’s investigation both men testified that the funds represented reimbursements for expenses. No receipts were produced.

Messrs. Schriecht and Hill did not accurately disclose to investors that they were taking money from the Fund and the Software Company. The operating agreement required that investors be furnished with audited financial statements each year. Those statements were only furnished in certain years however.

The financial statements that were furnished to investors – and used to solicit new investors – were materially misleading. For example, while the statements noted that there was $1 million in outstanding loans to Global Management, they failed to state that the funds had been loaned to Messrs. Schriect and Hill. The statements also failed to disclose that the two men had misappropriated additional funds. And, the disclosure regarding the related party transactions was materially incomplete, failing to fully disclose their compensation and the sums transferred to them.

The complaint alleges violations of Exchange Act Section 10(b), Securities Act Section 17(a) and Advisers Act Sections 206(1), 206(2) and 206(4). The action is pending. See Lit Rel. No. 23683 (Nov. 7, 2016).

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by T. GormanPosted on Posted in SECActions

Former financial executive Andrew Caspersen was sentenced to serve four years in prison after defrauding investors of over $38 million followed by three years of supervised release. Restitution will be determined by the court at a later date. U.S. v. Caspersen, No. 16-cr-0414 (S.D.N.Y.); see also SEC v. Caspersen, Civil Action No. 16-cv-2249 (S.D.N.Y. Filed March 29, 2016).

Mr. Caspersen, a former managing principal of Blackstone Group, and a partner at Park Hill Group which raises capital for private equity, previously pleaded guilty to one count of securities fraud and one count of wire fraud. The charges are based on claims that he raised millions of dollars using a shell company named to sound like a well known hedge fund. The SEC filed a parallel action.

Andrew Caspersen had been a managing principal at his firm, a registered broker dealer, since 2013, according to the facts detailed in papers from each case. Beginning in 2014, and continuing until his arrest in March 2016, Mr. Caspersen solicited investors to invest in what he clamed would be secure loans made to private equity firms. In fact none of the money was invested. Rather, he misappropriated the funds. Much of the investor money was lost trading options while other portions were used to pay earlier investors.

In 2015 he formed Irving Place III SPV and established a bank account for the firm, according to the SEC. The name of his firm closely resembled that of a well established hedge fund, Irving Place Capital Partners III SPV. Mr. Caspersen’s firm had no assets, unlike Irving Place Capital Partners.

October 2015 Mr. Caspersen obtained a $25 million investment from a non-profit charitable affiliate of an investment limited partnership. To secure the investment he offered a promissory note that paid 15% annual interest on a quarterly basis. The note was redeemable in 90 days. It was secured by Irving Place III SPV and its supposed assets. The investor wired the funds to the bank account of the entity. Mr. Caspersen took control of the money and diverted it to his personal use.

In March 2016 Mr. Caspersen solicited an additional $20 million investment from the same investor. He also approached a second investor, seeking a $50 million investment. Essentially the same misrepresentations used to obtain the first investment were employed. The first investor had become suspicious and requested that the note be redeemed. Neither investor furnished any money to Mr. Caspersen or his investment vehicle.

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