SEC Sanctions Adviser Who Secured False Morningstar Star Rating

The Commission’s focus on retail investors turned to an unregistered investment adviser who marketed shares in two unregistered investment funds. While the marketing was done by using misrepresentations coupled with omissions as in many cases, in this instance the marketers managed to secure assistance: Morningstar, the investment research giant, listed one of the funds on its website with the highest five star rating. In the Matter of Steven Zoernack, Adm. Proc. File No. 3-17157 (Feb. 26, 2018).

Respondent Steven Zoernack was the investment adviser, managing member and sole owner of Respondent EquityStar Capital Management, LLC, a firm he formed in 2010. The adviser managed two funds, Momentum Growth Fund, LLC and Global Partners Fund, LLC. Over a period of three years, beginning in early 2011, Respondents offered and sold interests in the two funds. Specifically, from March 2011 through about mid-2012 about $2.6 million was raised from 20 investors who purchased shares in Global Partners. From August 2012 through March 2014 Respondents raised about $3 million offering shares in Momentum. Both funds invested primarily in large cap stocks. Although Mr. Zoernack was the only employee of the operation, he used three aliases to make it appear that there were others.

Mr. Zoernack prepared all of the marketing materials. Those materials did not mention him but claimed that the manager had an impeccable and unblemished past record with the SEC. The materials failed to mention Mr. Zoernack’s two prior criminal fraud convictions and his personal bankruptcy. Mr. Zoernack took steps to conceal that past by hiring an internet-based search engine manipulator. That person created websites with false positive information about Mr. Zoernack and then repeatedly hit them so that search engines would pull up the positive information first.

Respondents also secured a five star Morningstar rating for Momentum. That rating is only given to about 10% of the funds rated. It resulted in the Momentum being listed as a five star fund by Morningstar. The rating was based entirely on information submitted to Morningstar by Momentum. Specifically, the fund claimed that it had over $120 million in funds under management since 2012. Yet the fund did not exist in 2012 – Morningstar required three years of data. In addition, the returns listed on Morningstar were hypothetical or “back-tested,” although this was not disclosed. The fund also did not have more than $3 million in assets under management, not the $120 million claimed. Finally, the biography of the manager omitted the criminal convictions, bankruptcy and judgments against Mr. Zoernack.

The misrepresentations made to Morningstar regarding the performance of Momentum were repeated in marketing materials furnished to potential investors. Specifically, those materials presented back-tested results without disclosing that they were hypothetical.

Finally, over a period of time Mr. Zoernack made about $1 million in unauthorized withdrawals from the funds. The money was booked as loans. In fact the amounts were diverted to his personal use. As trading losses mounted the so-called loans, by 2014, became well over 50% of the NAV of each fund. The Order alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b), and Advisers Act Sections 201(1), 206(2) and 206(4).

To resolve the proceedings each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. Mr. Zoermack is also barred from the securities business and each Respondent is barred from affiliation with an investment adviser. Respondents were directed to pay, on a joint and several basis, $2,890,518.54 which will be satisfied by the forfeiture money judgment entered in U.S. vl Zoernack, No 17-cr-13 (M.D. Fla.). The Commission also chose to forego a penalty in view of Mr. Zoernack’s 60 month prison sentence.

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