The Securities and Exchange Commission (“SEC”) reached a $350,000 settlement with a firm that served as an administrator to private investment funds in relation to allegations that it failed to respond to red flags and correct faulty accounting by two of its clients.
Following an investigation by the SEC’s Asset Management Unit, the agency found Apex Fund Services either missed or ignored clear indications of fraud while being engaged to keep records and prepare financial statements and investor account statements for funds managed by ClearPath Wealth Management and EquityStar Capital Management, both of which have since been charged with fraud by the SEC.
Andrew Ceresney, director of the SEC’s Division of Enforcement, said Apex failed to fulfill its gatekeeper responsibilities and allowed the schemes to continue at each firm.
“Fund administrators are responsible for ensuring that fund records provide accurate information about the value and existence of fund assets,” Ceresney said.
The settlement reflects the SEC’s ongoing efforts to confirm adequate compliance protocols are not only in place but also being adhered to on an ongoing basis. Private funds and their administrators should ensure that processes to both detect and — equally important — respond to potential fraudulent activity are in place and rigorously followed.
ClearPath and its owner, Patrick Churchville, were charged with fraud in May 2015. In this case, the SEC alleged that Apex failed to respond appropriately after discovering undisclosed brokerage and bank accounts, undisclosed margin and loan agreements, and inter-series and inter-fund transfers made in violation of fund offering documents. It also failed to correct previously issued accounting reports and capital statements, and instead continued to provide “materially false” reports and statements to both ClearPath and the funds’ independent auditor. These false reports were then used to communicate inaccurate financial positions and performance to the funds’ investors.
EquityStar and its owner, Steven Zoernack, were charged in March 2016. The SEC alleged Apex accounted for more than $1 million in undisclosed withdrawals by Zoernack from EquityStar funds as receivables owed to the funds, despite the absence of evidence that Zoernack was able or willing to repay the withdrawals. Although Apex confronted Zoernack and concluded he was unlikely to repay the funds, the firm failed to adequately account for the improper withdrawals, which accounted for more than half of the net asset value of one fund and more than one quarter of the other. Subsequently, Apex issued account statements to investors that it knew or should have known materially overstated the investors’ true holdings in the funds.
Apex neither admitted nor denied the charges as it agreed to retain an independent consultant and pay $352,449, including disgorgement of $96,800, $8,813 in interest and a $75,000 penalty in relation to the ClearPath fraud. For its role in the EquityStar fraud, it agreed to pay disgorgement of $89,050, interest of $7,786 and a penalty of $75,000.