The SEC’s First DPA With an Individual
The SEC entered into its first deferred prosecution agreement with an individual. The agreement with Scott Herckis, former administrator to hedge fund Heppelwhite Fund LP. The agreement recognizes his timely and significant contributions to the Commission’s efforts to halt an on-going fraud at the hedge fund which once employed Mr. Herckis. At the same time, the five year agreement imposes many of the remedies the agency would have demanded in settlement.
The underlying case
Mr. Herckis, the owner and managing member of accounting firm SJH Financial, LLC, was retained by the Fund in December 2012, according to an admitted statement of facts in the agreement. The Fund had about 25 investors and at least $6 million in assets. Its sole shareholder was Berton Hochfeld, manager of Hochfeld Capital Management, LLC. As fund administrator, Mr. Herckis was responsible for calculating the performance of the investments, preparing monthly account statements for investors and maintaining other pertinent accounting records.
Hochfeld Capital Management or HCM, the general partner, and each of the Fund’s limited partners or investors, had capital accounts at the Fund. Hochfeld Capital was required to maintain a balance in its capital account equal at least 1% of the Fund’s total assets. The Fund was prohibited from making loans to Mr. Hochfeld or the management company.
When Mr. Herckis began the HCM capital account had a positive balance. Repeated withdrawals by Mr. Herckis and transfers to other accounts he controlled changed that fact. Eventually the account had a negative balance.
As the withdrawals mounted, Mr. Herckis realized that there was an increasing discrepancy between the Fund’s net asset value which he calculated using the internal records and the NAV reported to the Fund’s prime broker. In June 2012 Mr. Herckis, in conjunction with a consultant, determined that the discrepancy was $1.5 million.
In September 2012 Mr. Herckis resigned and reported the difficulties to the authorities. He worked closely with the SEC, furnishing them a substantial number of documents and detailing the wrongful conduct. As a result the Commission brought an action against Mr. Hochfeld in which he consented to the entry of an injunction, an asset freeze and other relief. SEC v. Hochfeld, Civil Action No. 12-cv-8202 (S.D.N.Y.). Eventually Mr. Hochfeld pleaded guilty to criminal charges. U.S. v. Hochfeld, No. 13-CR-0021 (S.D.N.Y.).
The agreement is for a term of five years. Under its terms Mr. Herckis:
Admissions: Admitted the facts regarding the underlying violations as detailed in the agreement;
No violations: Will not violate Federal or state securities laws;
Securities business: Will not serve in any capacity with an investment company or an investment adviser;
Disgorgement: Paid disgorgement in the amount of $48,000 along with prejudgment interest; and
Cooperation: Continues to cooperate with the Commission.
Previously, the Commission entered into non-prosecution and deferred prosecution agreements only with corporations. For example, the SEC entered into a non-prosecution agreement with Carter’s Inc. which involved a financial fraud. The agency entered into a deferred prosecution agreement with Tenaris S.A., centered on FCPA violations. While the SEC had entered into cooperation agreements with individuals, it had not previously entered into a non-prosecution agreement with an individual.