Earlier this year, Attorney General Eric T. Schneiderman announced the resolution of an investigation into a New York–based hedge fund manager, which managed two hedge funds (collectively, the "Manager"). The hedge funds' investment strategy primarily involved selling equity options and collectively had approximately $12 million in assets and over 160 investors. The Office of the Attorney General of the State of New York (OAG) alleged, among other things, that the marketing pitch book the Manager used to market to potential investors failed to include "scenarios showing how Funds could lose money." In addition, the Funds' offering memoranda failed to disclose that a complaint had recently been filed against the Manager by the Financial Industry Regulatory Authority (FINRA), which alleged that the Manager, in his role as an anti-money laundering officer at a different firm, had failed to respond to certain "red flags of suspicious activity."
The OAG concluded that the Manager had violated provisions of New York's Martin Act and Executive Law. Remedial measures included (i) sending a "disclosure letter" to each investor in the funds, (ii) allowing investors to redeem all or part of their investments in the funds, (iii) restrictions on the use of certain marketing materials, and (iv) prompt distribution to investors of audited financial statements. Penalties included a $20,000 payment, an agreement that the Manager would not apply for a tax deduction or credit with respect to the foregoing payment, and an agreement that no portion of such payment would be paid by the funds or their investors or any other fund operated by the Manager. For a copy of the related Assurance of Discontinuance, click here.