The SEC charged an investment advisory firm and its owner with engaging in deceptive trades in order to collect extra monthly fees from a pair of hedge funds that were under their management.
Specifically, the SEC alleged that the firm and its owner engaged in fraudulent trading continuously in order to circumvent the impact of the "high-watermark" fee structure through which the owner would receive no fees unless the firms' funds made profits that exceeded past losses. The SEC alleged that the owner engaged in fraudulent trading by effectively making trades that enabled the funds to realize large gains near the end of the current month, while guaranteeing larger losses that would be realized early in the following month. In addition, the owner's charity was charged with improperly returning money to the firm.
The firm and its owner consented to an interim order that (i) restricts them from accessing $7 million of their own investments in the funds, (ii) bans them from collecting additional fees unless they satisfy the "high watermark" in the funds' fee structure, and (iii) restricts them from "taking additional investments in the fund."
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