SEC Brings Case Against Investment Manager for Manipulating Data in Investor Communications

On May 29th, 2024, the U.S. Securities and Exchange Commission (“SEC” or “Commission”) charged a hedge fund manager¹ with making false statements about the risk exposures of three private funds.
The SEC alleged that the manager manipulated portfolio risk and exposure data which was provided to investors.
The manager was charged with Section 206(2) of the Investment Advisers Act and Rules 206(4)-8 and 206(4)-7. The manager was fined $350,000.

Manipulated Exposure Data: The manager disseminated manipulated data in tear sheets, portfolio snapshots, and “top ten” exposure data. The data manipulation was done by a senior employee who adjusted betas, reported on securities which were not actual holdings of the funds, and consolidated certain holdings to obscure actual risk exposure. The manipulation was not caught until a lookback review was conducted as a result of certain investors receiving reports without compliance approval.
- Analysis: Many compliance programs allow data updates to be made in marketing and reporting materials without compliance approval. While that approach may save time, a compliance process that reviews data and compares it to previous versions might prevent similar manipulation from occurring at other managers.
Trading Away / Investment Allocation: One of the principals of the manager managed a private fund which he did not disclose to the firm. The private fund traded in similar markets as the manager’s funds. While the manager did discover the existence of this fund, it failed to disclose this fund to investors.
- Analysis: The existence of competing funds or clients is a critical component of investment allocation disclosure.

Significant Risk in Data: Currently, many compliance programs do not require reviews of data used in marketing or investor reporting. This creates significant risk since performance data, exposure data, and risk metrics are some of the most important data points used by investors. Many compliance programs adopt this policy because they feel that they lack the expertise to evaluate data; however, this creates a major compliance blind spot. Reviewing performance data against previous versions to spot anomalies, partnering with the finance function, or doing lookback reviews could provide significant risk mitigation.
Disclosure of Other Vehicles: While many firms disclose allocation factors, policy, and process, some do not disclose new competing investment vehicles. Disclosing any competing investment vehicles or disclosing that the manager will create new competing investment vehicles is an important component of investment allocation disclosure.

¹ In the Matter of Mass Ave Global, Inc. File No. 3-21949