Securities and Exchange Commission
sent a message to unregistered investment advisers such as hedge funds managers Monday: You are being watched.
The agency announced a settlement with a pair of hedge fund executives in what it said was the first time it penalized an unregistered investment adviser for failing to supervise a subordinate who was defrauding investors.
Wilfred Meckel, 57, and Robert Littell, 40, respectively the founder and portfolio manager of Marque Millennium Group, reached a settlement that neither admitted nor denied the agency's allegations regarding a trio of failed hedge funds that traded between 1997 and 2001. The funds, Marque Partners I, Marque Partners II and Marque Fund III Ltd., took in a total of $127 million from investors but lost their money using a trading system Littell invented.
Throughout the first three years of the funds' activity, Littell never hired an accountant, and simply used his own calculations to tell investors they were making money, the SEC said. He didn't keep records of his trades and never checked them against confirmations or account statements from the funds' prime brokers, according to the agency's complaint.
The funds were in fact racking up double digit losses on a monthly basis.The SEC said Littell was telling investors a different story, and Meckel "failed to reasonably supervise Littell with a view to preventing violations of the federal securities laws."
Caren Nelson Pennington, an assistant regional director in the SEC's northeast regional office in New York, said this was the first time the agency had prosecuted an unregistered investment adviser for not stopping a subordinate's misdeeds, and said it would press similar cases in the future.
"The commission does think it's significant to notify people that this is something they should be subject to," she said. "There may be some people out there who are associated with unregistered advisers -- such as hedge funds -- who may think they don't have any requirements for supervision, and that's not the case. This highlights that."
Meckel was suspended from associating with any investment adviser for six months and also censured. He repaid investors $600,000 and did not face a further fine.
Littell was fined $15,000 after filing a statement that said he could not afford to pay more. He was permanently banned from associating with any investment adviser.
"Whether registered or unregistered, employees of investment advisers and the hedge funds they advise can and will be subject to enforcement action if they fail to act appropriately to protect investors," said Mark Schonfeld, an SEC associate director. "Reliance on what a hedge fund employee says, without independent verification, is not good supervision."