RIA Compliance Blog
Last month, the Securities and Exchange Commission (“SEC”) brought and simultaneously settled administrative charges against an investment adviser and its owner for misleading clients regarding the historical performance of a private fund managed by the adviser and for making misleading statements regarding the fund’s investment strategy. Specifically, the SEC announced it had settled an administrative proceeding on January 28, 2016, against QED Benchmark Management LLC and its owner, Peter Kuperman, in which administrative proceeding the SEC alleged that QED and Kuperman represented that they would follow a scientific stock selection strategy.
According to the SEC, QED deviated from that strategy, which deviation resulted in heavy losses to QED’s fund. After experiencing the losses, according to the SEC allegations, QED and Kuperman provided investors in the fund with information about the fund’s performance and supported that misleading information with statements of returns that included both actual and hypothetical returns, in violation of SEC guidance prohibiting misleading performance advertising.
The strategy Kuperman advertised was billed as the “five-categories” strategy, which purported to review 285 metrics in broad categories such as momentum, growth, value, and risk. QED’s goal was to select investments that would outperform the market using that strategy. The offering memorandum for the fund also limited how much the fund could hold in a single security. After Kuperman started investing heavily in a single stock, investment returns declined dramatically, i.e. -78.81% alone in the first quarter of 2009. Kuperman attempted to conceal these losses by substituting hypothetical returns for actual returns in documents he provided to investors later in 2009. Beginning in 2010, Kuperman and QED acquired approximately $2.2 million in new capital, most of which came from new investors. All of the investors were provided with fraudulent marketing documents, and, according to the SEC Order, none of them received any corrective disclosures.
Adding to QED’s woes, in 2010 Kuperman purchased $300,000 worth of convertible debentures of a Canadian shell company which had no assets and negative cash flow. According to the SEC, Kuperman performed no due diligence on the company before investing. Kuperman also participated in providing false valuations of the debentures by sending values to the fund’s administrator that were not supported by the company’s trading price. In 2011 Kuperman added to the fund’s position, and eventually investments in the shell company came to represent approximately 50% of fund assets.
QED and Kuperman were alleged to have committed a number of fraudulent acts, including the initial failure to disclose to the investors why they had deviated from the represented investment strategy in the first place, misrepresenting the fund’s performance and the valuation of its assets, failing to disclose to investors that they had misrepresented the valuations and failing to make accurate disclosures about liquidity and the availability of funds for redemptions. The Order recites that QED and Kuperman willfully violated Sections 206(1), 206(2) and 206(4) of the Advisers Act, which prohibit fraudulent conduct by an investment adviser, and Rule 206(4)-8 , which prohibits fraudulent conduct by advisers to “pooled investment vehicles,” or funds, with respect to investors or prospective investors in those funds.
QED and Kuperman agreed to settle the charges by consent without agreeing or denying to the allegations. QED and Kuperman will reimburse investors $2.87 million and pay a $75,000 civil penalty and agreed to be barred from the securities industry indefinitely.
Parker MacIntyre provides legal and compliance services to investment advisers, broker dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Visit our website for more information.