Securities Law & Corporate Counsel Blog

On December 1, the SEC announced enforcement actions against three advisory firms and six individuals as part of the Commission’s new initiative whereby the Commission’s Asset Management Unit uses proprietary risk analytics to evaluate hedge fund returns. Performance that appears inconsistent with a fund’s investment strategy or other benchmarks forms a basis for further scrutiny. The enforcement actions allege that the firms and managers engaged in a wide variety of illegal practices in the management of hedge funds or private pooled investment vehicles, including fraudulent valuation of portfolio holdings, misuse of fund assets, and misrepresentations to investors about critical attributes such as performance, assets, liquidity, investment strategy, valuation procedures, and conflicts of interest.The enforcement action filed against ThinkStrategy Capital Management LLC is particularly instructive.  In this action, the SEC charged the New York-based firm and its managing director with fraud in connection with two hedge funds they managed. At its peak, ThinkStrategy reportedly managed approximately $520 million in assets.  However, the SEC’s complaint filed on Nov. 9, 2011alleges that ThinkStrategy engaged in a pattern of deceptive conduct designed to bolster the funds’ track record, size, and credentials.  Specifically, the SEC alleges that ThinkStrategy materially overstated the funds’ performance and gave investors the false impression that their returns were consistently positive and minimally volatile.  ThinkStrategy also allegedly inflated the funds’ assets, exaggerated the firm’s longevity and performance history, and misrepresented the size and credentials of firm’s management team.Given the new information the SEC will acquire through Form PF, we can expect to see increased regulatory scrutiny against private fund managers rooted in suspiciously inflated performance returns.For additional information please contact us at (619) 298-2880.