In a recent enforcement case (In the Matter of Retirement Investment Advisors, Inc., Research Holdings, LLC, and Joseph Wayne Bowie, IA Release No. 4237, October 21, 2015), the SEC issued a cease and desist order and imposed remedial sanctions upon a registered investment adviser, an affiliated unregistered investment adviser, and its president for various violations of the Investment Advisers Act of 1940.
In the SEC’s complaint, the respondents were alleged to have violated, among other provisions under the Advisers Act, the” anti-fraud” provisions. Specifically, the unregistered adviser and its principal sold interests in various private funds organized and managed by the unregistered adviser to clients of the registered adviser. Two of the funds were sold with the promise to investors that they would receive audited financial statements of the fund on an annual basis. However, due to the costs of obtaining audited financial statements, the funds did not have the audits conducted. In addition, the offering documents of each of the private funds informed investors that the funds’ financial statements would be prepared in accordance with GAAP. Instead, the funds’ assets were valued at cost rather than fair market value as required under GAAP. The SEC pointed out that the unregistered adviser knew at the time that some of the assets held in some of the funds were at no value or significantly lower value than their cost. In addition, the valuation of the funds’ assets were contrary to the registered adviser’s policy of valuation of securities that required securities to be valued at current market rates.
The inflated values of the assets in several of the funds resulted in clients who invested in the funds paying a greater advisory fee than if such assets were valued at market rates.
Finally, the president of the adviser apparently deleted certain emails that reflected the disbursement of fees and advice about client accounts although all such emails are required to be maintained by the adviser under the books and records requirements under the Advisers Act.
In determining the sanctions to be imposed in this matter, the SEC apparently took into account the remedial and prompt actions taken by the respondents in connection with the SEC’s investigation. Such actions included reimbursement of fees to clients who invested in the various private funds.
In addition to the cease and desist order issued by the SEC against each of the respondents, the respondents were censured and ordered to pay disgorgement of $144,243, prejudgment interest of $14,742, and combined civil penalties of $100,000. The disgorgement and interest payments are to be used for a disgorgement fund established to reimburse clients for overpayment of fund management fees.