SEC Charges IA With Fraud Tied To Conflicts, Undisclosed Interest
Undisclosed conflicts by investment advisers and others is a focus of the current SEC enforcement program. In its most recent action, the conflicts came from a firm with an indirect, undisclosed controlling interest in the adviser. Unlike most of these actions, however, it did not settle at filing and was brought in federal district court as a civil injunctive action rather than as an administrative proceeding. SEC v. Atlantic Asset Management, LLC (S.D.N.Y. Filed December 15, 2015).
Atlantic Asset, previously known as Hughes Capital Management, LLC, has been a registered investment adviser since 1993. Hughes changed its name to Atlantic in 2015 after it was merged with another adviser. The firm is a wholly-owned subsidiary of GMT Duncan LLC.
BFG Socially Responsible Investments Ltd., holds a significant interest in GMT, acquired in 2014. The firm had the right under certain agreements to select one member of GMT’s board of directors and the CIO for that firm and Hughes.
The 2014 Form ADV for Hughes did not disclose the interest of BFG in the firm. Yet that form requires advisers to identify each controlling person. It also requires the disclosure of direct and indirect owners. When Hughes filed an amended Form ADV disclosing its acquisition by GMT the adviser stated that the parent had two partners. BFG was not mentioned.
BFG appointed the Hughes CIO. In August 2014 the CIO proposed the acquisition of certain Tribal bonds. An indenture for the bonds stated that the proceeds were to be used primarily to acquire an annuity which would be provided and managed by BFG’s parent, the Annuity Provider, for a fee. The placement agent for the bonds would also be paid a fee. Although there were significant questions regarding the Tribal bonds, the CIO invested over $27 million on behalf of nine of the adviser’s clients.
Subsequently, several Hughes clients expressed concerns regarding the purchase of the Tribal bonds. Specifically, there were questions regarding their valuation and suitability. A demand was made to unwind the deal. While Hughes assured the investors the Placement Agent had others interested in acquiring the bonds, no purchasers emerged.
In April 2015 a second purchase of Tribal bonds was made. In total the adviser had invested over $40 million in the bonds. While investors again raised questions regarding the transactions the investments were not unwound. Investors were not told about the conflicts or the interest of BFG.
In May 2015 when the adviser filed a Form ADV with the Commission it did not mention the interest of BFG. The complaint alleges violations of Advisers Act Sections 206(1), 206(2), 206(4) and 207. The complaint is pending.