RIA Compliance Blog
The Securities Exchange Commission (“SEC”) recently settled charges against a New Jersey private fund administrator, Apex Fund Services (“Apex”), for failing to notice or correct what it contended were clear indications of fraud by two of its clients, ClearPath Wealth Management (“ClearPath”) and EquityStar Capital Management (“EquityStar”). The SEC’s Division of Enforcement noted that Apex failed to “live up to its gatekeeper responsibility” and thereby enabled the fraudulent activities of these two investment advisers.
Apex provided accounting and administrative services to various private funds, including several managed by ClearPath and EquityStar. Its duties as fund administrator included keeping records, preparing financial statements, and preparing investor account statements. The SEC charged both ClearPath and EquityStar with securities fraud in enforcement actions, finding that ClearPath had allegedly misappropriated fund assets and used fund assets for unauthorized investments, and that EquityStar had allegedly made materially false and misleading statements to investors and prospective investors of its funds regarding undisclosed withdrawals of fund assets.
The SEC determined that Apex ignored or missed several red flags in regards to these funds, and separately brought charges against Apex for failure to satisfy its gatekeeper responsibilities. In regards to ClearPath, the SEC alleged that Apex ignored or missed undisclosed brokerage and bank accounts, related party transactions, inter-series and inter-fund transfers in violation of fund offering documents, and undisclosed margin or credit agreements. Despite these red flags, Apex allegedly continued to provide materially false accounting reports and statements to ClearPath, and took no stops to correct previously issued reports and statements. These materially false reports and statements were used by ClearPath to erroneously communicate its financial position and performance to its fund investors.
In regards to EquityStar, the SEC alleged that Apex ignored undisclosed withdrawals of more than $1 million from the funds by EquityStar’s managing member, Steven Zoernack. Instead of bringing the undisclosed withdrawals to the attention of investors, Apex incorrectly characterized the withdrawals as receivables due to the funds without verifying that EquityStar or Zoernack were willing or able to repay the withdrawals. In addition, Apex provided monthly statements to investors on behalf of EquityStar that did not state the existence of the withdrawals, and thus materially overstated the value of the investor’s holdings in the funds.
The SEC charged Apex with causing ClearPath and EquityStar’s violations of Section 206(2) of the Investment Advisers Act of 1940, which prohibits any investment adviser from engaging in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client, and Section 206(4) and Rule 206(4)-8 thereunder, which make it unlawful for any investment adviser to a pooled vehicle to make any untrue statement of a material fact or to omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading, or to otherwise engage in any act, practice or course of business that is fraudulent, deceptive or manipulative.
Apex agreed to settle the charges without admitting or denying the SEC’s findings. It must pay a total fine of approximately $350,000 for its role in the ClearPath and EquityStar frauds, including disgorgement, prejudgment interest, and penalties. Apex also agreed to retain an independent compliance consultant to conduct a comprehensive review of Apex’s compliance policies and procedures with respect to fund administration.
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