Lone Star Value Management LLC (“Lone Star”) and its owner Jeffrey Eberwein settled with the Securities and Exchange Commission (“SEC”) over charges that it executed 21 trades without disclosing they were principal trades.
Lone Star operated as an exempt reporting adviser in Connecticut. Mr. Eberwein launched the Investors Fund in 2013 with $35 million of his own money then recruited 39 investors over the next year. In 2014, he created the Co-Invest II Fund, receiving funds from approximately 19 investors.
The SEC Order states that Lone Star and Mr. Eberwein, as its founder, CEO and sole portfolio manager, effected 19 cross trades between the two funds during the period between August and November 2014. Specifically, the SEC stated that because Mr. Eberwein consistently owned more than 35% of the Investors Fund, the trades between the funds were principal trades. It alleged that Lone Star failed to disclose in writing the trades and the related conflicts of interest issues, thereby failing to secure the consent of the clients prior to the trades.
In March 2015, Lone Star registered with the SEC as a non-exempt investment adviser (and, in April 2018, withdrew from registration).
The SEC Order further states that while still acting as principal, Lone Star completed two trades between the Investors Fund and a separately managed account advised by Lone Star in June 2015, without disclosing or obtaining client consent.
Section 206(3) of the Advisers Act prohibits an investment adviser from “engaging in or effecting a transaction on behalf of a client while acting as a principal for its own account, or as a broker for a person other than the client,” without disclosing its role in the transaction to the client in writing before the transaction is completed.
Section 206(4) and Rule 206(4)-7 of the Adviser’s Act further require that investment advisers implement written policies and procedures to prevent violations, including disclosure violations. Though Lone Star’s written policies and procedures did address principal trades and require the firm to disclose to clients in writing and obtain their approvals when it was executing principal trades, the SEC alleged that the policy was not implemented.
To settle the charges, Lone Star agreed to a cease and desist order, a $100,000 fine, and a censure. Mr. Eberwein will also personally pay $25,000.
Read the full SEC Order.
Does Your Firm Properly Disclose Conflicts of Interest?
The SEC has shown commitment to protecting the retail investors, setting disclosure of conflicts of interest as one of its highest priorities. Regulatory actions have been frequently brought against firms that do not properly disclose potential or actual conflicts of interest to its investors. Firm compliance officers must be aware of all relationships of its advisers and both completely and accurately describe disclosures on the firm’s form ADV and other client documents. These documents must be updated as circumstances and relationships materially change.
Let Our Experience Work for You
Jacko Law Group can help your firm avoid similar regulatory actions. Our team of attorneys can help your firm to identify and disclose conflicts of interest, create policies and procedures to address the firm’s disclosures and further review firm documents.
There are common disclosures that firms overlook or fail to identify, and our team of attorneys will use our extensive experience to ask detailed questions designed to determine if all business activities, relationships and holdings have been accurately and completely disclosed.
Contact Jacko Law Group today at 619-298-2880.
Robert D. Conca is a Partner at Jacko Law Group, PC. His practice includes representation of investment advisers, broker-dealers, private funds, and non-financial industry companies, and their personnel, in a variety of ...
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