Cannell Capital

AUM: $532 million
Date: February 2
Penalty/Fine; Other discipline
$150,000; censure
Cause: Policies and procedures around MNPI

Cannell Capital had a unique strategy of trading low-volume, small-cap stocks, which involve a lot of close contact with corporate insiders. The problem, regulators said, was that Cannell Capital’s MNPI policies and procedures were too “generic” to address the “heightened risk” they faced, Moustakis says.

Cannell paid $150,000 and accepted censure to settle the SEC’s case in February.

The lesson? “Have a look at your own strategy, look at your own business and almost like a web,” Moustakis says. Ask “what are the weak spots in the web, where the MNPI may creep in, and craft appropriate policies and procedures around those risk areas.”

Lone Star Value Management

AUM: $150 million (as of June 2015)
Date: February 28
Penalty/Fine; Other discipline
$100,000; censure
Cause: Policies and procedures around MNPI

In February, Lone Star Value Management settled claims that it didn’t properly disclose conflicts of interest in trades it was making, and didn’t have procedures in place to prevent that happening.

Lone Star’s troubles centered around common stock cross trades between funds it managed, and other transactions between one of its funds and a separately managed account for which it was an investment advisor. The cross trades were executed because founder Jeffrey Eberwein had invested $35 million of his own cash in the funds, but the SEC said Eberwein and Lone Star “failed to disclose in writing that it engaged in these principal transactions and did not obtain client consent.”

Nothing in the SEC’s settlement order suggests Eberwein engaged in self-dealing, or favored his own funds, or that the funds on the other side were reduced by the transactions, Moustakis says: “That compliance failure alone could have been avoided with just a slightly greater awareness around conflicts, or just a bit more attention to compliance requirements.”

Old Ironsides Energy

AUM: $1.6 billion
Date: April 17
Penalty/Fine; Other discipline
$1 million; censure
Cause: Advertising rule

Monomoy Capital Management

AUM: $1.25 billion
Date: April 22
Penalty/Fine; Other discipline
$1.9 million; censure
Cause: Disclosures (conflicts of interest: operating partners)

Monomoy had provided its portfolio companies with in-house operations group services for years, but it changed the formula by which it filed those expenses without proper notice, the SEC said.

It underlines how important it is to be consistent and open about your allocation strategy, Moustakis says.

“If an advisor discloses A, B and C, but it routinely does B all the time and hardly ever does A or C, the disclosure should read that we do and have done B and we may on occasion do A and C,” Moustakis says.

Everest Capital

AUM: $3.7 billion
Date: April 30
Penalty/Fine; Other discipline
$3.2 million; censure
Cause: Disclosures (risk)

Ares Management

AUM: $165 billion
Date: May 26
Penalty/Fine; Other discipline
$1 million; censure
Cause: Policies and procedures around MNPI

Ares had invested $200 million in publicly traded portfolio companies’ debt and equity securities and under the investment terms received the right to appoint a couple directors to the company’s board.

The firm then appointed a senior manager from the deal team that had  worked on the investment to the board, says Moustakis, but the senior manager continued to participate in Ares investment decisions concerning the company’s stock.

“Ares had policies and procedures in place to address MNPI issues,” he says. “And the order found that Ares generally followed those procedures, but not as consistently or carefully in the SEC’s view.”

Ultimately, it was a failure on the compliance team’s part to document the MNPI inquiry with the senior manager involved.

Ares paid $1 million and accepted censure in May.

Rialto Capital Management

AUM: $4.7 billion
Date: August 7
Penalty/Fine; Other discipline
$350,000; censure
Cause: disclosure and policies and procedures around expenses

Rialto Capital Management got its hands slapped for misallocating expenses related to certain tasks to the funds it managed.

“The primary selling point of the funds, according to the SEC order, was Rialto’s ability to perform certain tasks in-house like due diligence, accounting, valuation and similar services,” Moustakis says.

Rialto was entitled to reimbursement for those tasks, but, according to the SEC’s settlement order, Rialto hadn’t properly disclosed the methodology behind the services, hadn’t properly disclosed its market rate analyses and its cost allocation methodology, and that it didn’t have the policies and  procedures in place to stop this happening. “A lot of this just underscores the fact that, the adequacy of disclosures is critically important when it comes to the fees and expenses cases, or any conflict of interest,” Moustakis says. “The SEC expects advisors to have a record confirming the accuracy of their disclosures. It’s not just that you do good work, you need to be able to show your good work.”

Northern Trust Hedge Fund Services (et al)

AUM: Unknown
Date: September 18
Penalty/Fine; Other discipline
Cause: Fraud, misappropriation

Palmer Square Capital Advisors

AUM: $10.2 billion
Date: September 21
Penalty/Fine; Other discipline
$450,000; censure
Cause: Custody rule (cross trades), disclosures and client consent

Fees and expenses

There have been long-simmering tensions between LPs and GPs over the opacity of private funds’ fees and expenses. In 2020, the SEC made clear whose side its on. In April, Monomoy Capital Management paid $1.9 million to settle claims that it hadn’t properly disclosed its fee structure. In August, Rialto Capital Management paid $350,000 and accepted censure to settle similar claims.

What’s important to note about each case, says former SEC enforcement attorney Philip Moustakis, now counsel to Seward & Kissel, is that no actual money was lost: Monomoy and Rialto were dinged, essentially, for not having the proper paperwork for their fees and expenses.

Material non-public information

This year was a momentous one for private funds and their regulators. This was the year that federal regulators made clear that it’s no longer enough for private funds to manage insider trading – they’ll have to manage for the risk of insider information leaking out. Ares Management and Cannell Capital can tell you all about that.

“In reading the orders, you don’t get the underlying sense that the enforcement staff was investigating insider trading,” says Moustakis.

Disclosure of conflicts of interest

Conflicts of interests might well be the enforcement lawyers’ most important jobs program.

“I can tell you that within the [SEC’s] asset management unit, we saw undisclosed conflicts of interest that kept on giving,” says Moustakis.