RIA Compliance Blog
On April 17, 2017, the Securities and Exchange Commission (“SEC”) filed a complaint in the United States District Court for the Southern District of New York against Justin D. Meadlin (“Meadlin”), an investment adviser, and Hyaline Capital Management, LLC (“Hyaline”), his advisory firm. The complaint alleges that Meadlin and Hyaline made fraudulent misrepresentations and omitted material facts in order to “induce clients, and prospective investors… to invest funds with them.” These actions caused them to be in violation of Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 (“Advisers Act”) and Rule 206(4)-8 under the Advisers Act.
The SEC’s complaint alleges that from September 2012 to April 2013, Meadlin sent emails that exaggerated the amount of Hyaline’s assets under management (“AUM”) to clients and prospective investors. These emails provided that Hyaline had AUM that ranged from $17.5 million to $25 million. In reality, however, Hyaline had only $5.5 million in AUM during the relevant time period. Meadlin also sent emails that contained false statements pertaining to expected AUM.
The SEC also found that Meadlin made material misstatements in marketing materials concerning a “quantitative” trading strategy. From January 2013 to June 2014, Meadlin published a series of email solicitations as well as some information on subscription hedge fund databases. These publications stated that Meadlin had created a fund called Hyaline Capital Quantitative Fund (“HCQF”). They also claimed that Hyaline had obtained and was putting a “proprietary long/short equity algorithm.” Finally, Meadlin stated in the emails that he had historical performance returns that were allegedly from an algorithm and that HCQF had approximately $25 million in AUM. In reality, however, HCQF was a fictitious entity, and neither Meadlin nor Hyaline had a “proprietary” algorithm. Moreover, the supposed historic performance claims were really “based almost entirely on paper trades without real capital and exaggerated by approximately 20%.”
The SEC also determined that Meadlin’s fraudulent misrepresentations resulted in Meadlin obtaining two new clients. The first investor came to Meadlin based on the false claim that HCQF had $25 million in AUM and consented to start a separately managed account in July 2013. Meadlin later convinced this investor to transfer the funds in the separately managed account to a Bermuda entity that Meadlin had recently created. Throughout this time period, neither Meadlin nor Hyaline disclosed to this investor that the investor was the first client to invest in the “quantitative strategy” or that the investor was the majority investor in the Bermuda entity. Moreover, Meadlin and Hyaline’s misrepresentations resulted in this investor suffering losses. Meadlin and Hyaline also led another investor, based on their misrepresentations on a hedge fund database, to invest with them in November 2013.
The SEC’s complaint asks for the court to issue an injunction preventing Meadlin, Hyaline, and anyone associated with them from further violating the securities laws. The complaint also asks that the court order Meadlin and Hyaline to disgorge their ill-gotten gains. Finally, the complaint asks that Meadlin and Hyaline be obligated to pay civil money penalties.
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