SEC Sanctions Adviser, and its CEO, GC and Auditor Based on Conflicts
Conflicts of interest are a central focus for the SEC. Indeed, conflicts are at the core of many of the actions brought against regulated entities. And, an undisclosed conflict was at the center of actions brought against a hedge fund, its founder, general counsel and outside auditor. In the Matter of Alpha Titans, LLC, File No. 3-16520 (April 29, 2015); In the Matter of Simon Lesser, CPA, CA, File No. 3-16519 (April 29, 2015).
Respondents in the proceeding are: Alpha Titans LLC, a registered investment adviser; Timothy McCormack, its founder and CEO; and Kelly Kaeser, its general counsel and COO. Simon Lesser is a partner at McGladrey, a PCAOB registered accounting firm.
Alpha Titans is the general partner of Alpha Titans LP and the manager of Alpha Titan, Ltd., two Feeder Funds. Investors placed money with the feeder funds which was directed into a Master Fund. Ultimately the investor funds were invested in unrelated private funds. Mr. McCormack formed and directed all activities.
Investments in the Feeder Funds were governed primarily by private placement memoranda and the funds’ limited partnership and operating agreements. Under those agreements the Feeder Funds paid the registered adviser management and performance fees. Alpha Titans and Mr. McCormack paid most of Alpha Titans’ operating expenses with the Feeder Funds’ assets. This created a conflict of interest between Alpha Titans and Mr. McCormack and the Feeder Funds, according to the Order.
The PPMs state that the partnership “bears all of the expenses incurred by it or by others on behalf or for its benefit . . .” The Form ADV for Alpha Titans did not disclose that its clients paid most of its operating expenses, although those payments constituted compensation to the adviser. Payments for office rent, employee salaries and benefits and similar expenses totaled about $450,000.
GAAP requires that related party relationships be disclosed in financial statements. Since Alpha Titans, the Feeder Funds and the Master Fund were under common control they were related parties. From 2009 through 2012 the payments to Alpha Titans were thus material related party transactions. Those payments were not disclosed however, resulting in the audit opinions were incorrect. In addition, the failure to prepare the financial statements in accord with GAAP meant that the adviser was not in compliance with the custody rule since those financial statements were distributed in an effort to comply with that rule.
Messrs. McCormack and Kaeser were responsible for preparing, reviewing and updating Alpha Titans’ written compliance policies and procedures. From 2009 through 2012 those policies and procedures did not address Mr. McCormack’s control of related parties, how that might impact related party transactions or the related disclosure points. Specifically, the manual did not have any reasonably designed procedures to prevent violations of the Advisers Act from failures to disclose material conflicts or to act in the best interest of clients in connection with related party transactions.
The Order in the Alpha Titans proceeding alleges willful violations of Advisers Act Sections 206(2), 206(4) and 207. In the Lesser action it alleges willful violations of Advisers Act Section 206(4).
Each Respondent settled with the Commission, consenting to the entry of a cease and desist order based on the Sections cited in the Order in their respective action except that the order as to Mr. Kaeser is not based on Advisers Act Section 207(4)-7. Alpha Titans was also censured. In addition, Messrs. McCormack and Kaeser were both suspended from the securities business for twelve months. Mr. McCormack, however, can continue to be associated with Alpha Titans which began winding up prior to these actions and, pursuant to its undertaking, will continue to do so under the supervision of a monitor. Mr. McCormack’s association with the adviser will be subject to the monitor. Alpha Titans and Mr. McCormack will, on a joint and several basis, pay disgorgement of $469,522, prejudgment interest and a penalty of $200,000. Based on a declaration of financial condition a penalty was not imposed on Mr. Kaeser.
Mr. Lesser is denied the privilege of appearing or practicing before the Commission as an accountant with the right to apply for reinstatement after three years. He will also pay a civil penalty of $75,000.