The sanctioning of two California investment advisers over their communication with the media highlights the growing regulatory pressure on hedge fund managers.
Last month, the
Securities and Exchange Commission
issued a cease-and-desist order and a $20,000 civil penalty against Gerald Klein & Associates and to Klein, Pavlis & Peasley Financial, two Dana Point, Calif.-based registered investment advisers and co-managers of two small funds, Invest Talk Partners I and Invest Talk Partners II.
The SEC found that the two advisers broke the law by selling their hedge funds via radio programs, seminars and Web sites. The SEC also alleged that the funds had more than 35 non-accredited investors, another SEC violation. In general, hedge funds can't have more than 35 non-accredited investors and remain exempt from federal registration rules.
Accredited investors are investors with more than $200,000 in annual income and a net worth exceeding $1 million.
"We don't deny any of these allegations," says Stephan Peasley, partner at Klein, Pavlis & Peasley Financial and an associate of Gerald Klein, founder of both advisory firms. He acknowledged that he and his partner advertised the two funds on KCEO, a San Diego-based radio station. The funds were also promoted on the companies' Web sites, he says.
"But we did not think our marketing was a violation of the regulations," he says. "It was totally unintentional and inadvertent. From now on, we will keep our mouths quiet."
The Invest Talk funds are the advisers' first experience with hedge funds, and it is likely to be their last one. "We're very much discouraged," Peasley says. "We probably won't do anymore hedge funds. We thought we were doing something good for the people. But it's too hard."
Peasley said the number of non-accredited investors rose above 35 because the SEC counted investors at both funds, even though Talk Partners I pursued a growth and value strategy while the other was growth and dividend income.
"We thought those funds were two different things, but the SEC did not see it that way," he says. The strategies were "too close."
Peasley said the SEC started to audit the hedge funds' selling practices in late-2002 but only finalized its decision last month. "Look how long we've lived with the SEC and how big we are. Don't they have bigger fish to fry than this?" he says.
Calls to the SEC were referred to Sandy Harris, an SEC associate general director for the Pacific Region in Los Angeles, who did not immediately return calls.