More On Legal & Compliancefrom The Advisor's Professional Library
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
- Where Are We Headed? The ultimate compliance goal is to help ensure that everyone associated with an advisory firm acts ethically at all times. Advisors and RIAs should do the right thing, even when regulators are not looking over their shoulders.
The Securities and Exchange Commission announced Friday that it brought charges against a New York-based fund manager and his two firms for luring investors into a trading program that would “purportedly maximize their profits but instead spent their money in unauthorized ways.”
The SEC alleges that since at least November 2011, Jason J. Konior and his firms, Absolute Fund Advisors (AFA) and Absolute Fund Management (AFM), raised approximately $11 million by selling investors limited partnership interests in Absolute Fund LP, an investment vehicle that Konior claimed had $220 million in trading capital.
Konior and his firms “falsely claimed that Absolute Fund would allocate millions of dollars in matching investment funds, place the combined funds in brokerage accounts through which investors could trade securities, and operate a ‘first-loss’ trading program that would allow investors to dramatically increase their potential profits,” the SEC says.
However, the SEC alleges that instead of using investor funds for trading purposes, Konior and his firms siphoned off approximately $2 million of the proceeds to pay redemptions from earlier investors and to pay their personal and business expenses.
The SEC obtained an asset freeze against Konior and his companies late Thursday in federal court in Manhattan.
Bruce Karpati, Co-Chief of the SEC Enforcement Division’s Asset Management Unit, said in a statement that Konior “falsely portrayed Absolute Fund as a legitimate investment vehicle designed to maximize investors’ access to trading capital in order to grow their hedge fund businesses.” However, “in reality, Konior’s operation became a way for Konior to funnel cash to his firms and himself for unauthorized purposes.”
According to the SEC’s complaint, Konior falsely represented to several investors that upon receipt of their investments, Absolute Fund would:
- Allocate capital of up to nine times the amount of the investor’s capital contribution.
- Place the combined funds in a sub-account at a broker-dealer through which the investor could trade securities.
- Allocate any trading losses first to the investor’s contribution amount, and then any trading profits would be shared between Absolute Fund and the investor.
The SEC alleges that Absolute Fund did not actually operate the first-loss trading program as promised for these investors. Absolute Fund also did not provide these investors with any matching funds or satisfy investor demands for returns of their capital contribution.