SEC Charges Adviser With Misappropriation
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).