California-based hedge fund Alpha Titans was charged with using fund assets to pay for undisclosed operating expenses, becoming the latest example of the US Securities and Exchange Commission’s crackdown on fees and expenses.
The commission brought related charges to the firm’s outside auditor for failing to catch the error, which service providers may view as a warning shot about their liabilities when it comes to client bad behavior.
Alpha Titans founder Timothy McCormack, who also acted as the firm’s chief compliance officer, and general counsel and chief operating officer Kelly Kaeser, allegedly used feeder funds to finance certain management company overhead expenses, totaling $450,000, which included employee salaries, rent, parking, utilities and computer equipment.
While investors were told the fund would “bear all the costs and expenses of its operation,” the agreement didn’t disclose that the fund would be paying for Alpha Titans’ operational or administrative expenses, the SEC compliant said.
To settle the SEC’s charges, Alpha Titans and McCormack agreed to pay disgorgement of $469,522, prejudgment interest of $28,928, and a penalty of $200,000.
Both McCormack and Kaeser are barred from the securities industry for one year as part of the settlement. Kaeser also agreed to a one-year suspension from practicing as an attorney on behalf of any entity regulated by the SEC.
The SEC has made fees and expenses a priority area during examinations. While disclosure is the normal remedy for unclear fees and expenses, compliance experts warn that no amount of disclosure could justify charging investors (outside of the management fee) with overhead expenses.