On December 5, 2017, the Securities and Exchange Commission (“SEC”) filed an administrative proceeding against Paritosh Gupta (“Gupta”), his hedge fund, Adi Capital Management LLC (“Adi Capital”), his wife, Nehal Chopra (“Chopra”), and her hedge fund, Ratan Capital Management, LP (“Ratan”). In the Matter of Paritosh Gupta, et. al., Admin. Proc. No. 3-18296 (Dec. 5, 2017). The SEC alleged that Gupta caused violations of Section 206(2) of the Advisers Act by sharing confidential information, obtained during his employment at a hedge fund described only as “Adviser A,” with Chopra (Gupta’s eventual wife), who used that information in operating Ratan Capital. Moreover, the SEC alleged that Gupta, Adi Capital, Chopra, and Ratan willfully violated Section 207 of the Advisers Act—and that Gupta caused Ratan and Chopra to violate Sections 206(4) of the Advisers Act and Rule 206(4)-8 thereunder—by failing to disclose the nature of Gupta and Chopra’s communications and the role that Gupta played in advising Chopra on Ratan’s investment strategy. Without admitting or denying the findings, Gupta, Chopra, and their hedge funds agreed to settle the charges and cease and desist from committing or causing any further violations. Additionally, Gupta agreed to pay a civil penalty of $250,000, Chopra agreed to pay a civil penalty of $200,000, and Ratan Capital agreed to pay a civil penalty of $200,000. All four Respondents were censured.

The Order details how Gupta allegedly directed information and advice, obtained through his position as a senior research analyst at Adviser A, to Chopra, who used that information and advice in operating Ratan Capital. From 2005 through 2013, Gupta was employed with Adviser A, a hedge fund specializing in event-driven long/short strategies. Admin. Proc. No. 3-18296. In 2006, Gupta was introduced to Chopra, who, two years later, established Ratan, a hedge fund that also employed event-driven long/short strategies. Id. Gupta and Chopra married in November 2011.

According to the Order, Gupta, while employed with Adviser A, shared confidential information with Chopra such as investment theses, models, notes, recommendations, and analyses. In addition, Gupta allegedly advised Chopra to purchase and sell securities in which Adviser A either had a position or was considering a position. In doing so, Gupta allegedly violated Adviser A’s policies regarding the sharing of confidential information and caused violations of Section 206(2) of the Advisers Act, which prohibits an investment adviser from engaging in any transaction, practice, or course of business which operates as a fraud or deceit upon a prospective client. Moreover, Chopra and Ratan allegedly failed to disclose, in their communications with investors, Gupta’s involvement with Ratan. Investor communications from Ratan did not describe Gupta’s investment advice or strategic recommendations and did not reveal that Gupta was employed at a competing hedge fund. The SEC found that Gupta and Ratan’s failure to disclose this information violated Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder, which prohibit investment advisers to pooled investment vehicles from omitting material facts to current and prospective investors.

After Gupta and Adviser A terminated their relationship in 2013, Gupta proceeded to establish a new hedge fund, Adi Capital. According to the SEC, Adi Capital’s Form ADV Part 2A firm brochure acknowledged that Gupta was married to a principal (Chopra) with a competing hedge fund but claimed that Gupta and Chopra did not discuss information related to their funds’ investments or strategies. However, the SEC alleges that this statement was false and therefore constituted a violation of Section 207 of the Advisers Act, which makes it unlawful for any person to willfully make any untrue statement of material fact in a registration report filed with the SEC.

This enforcement action suggests that investment advisors should consider formal policies and procedures geared toward addressing insider trading, fiduciary and competitive risks associated with their employees’ personal and familial relationships. On the other hand, oversight in this area comes with the potential for employment law issues if such oversight could be viewed as invasive or discriminatory based on marital status or otherwise. Accordingly, careful thought needs to be given to any controls in this area.