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SEC takes aim at fund auditor’s alleged part in fraud case

The SEC is looking to take action against the auditor of a fund managed by Laurence Allen, who is appealing a ruling against him in a fraud case.

A Connecticut accountant and her firm let a private fund adviser juice his funds’ valuations in what one judge later called “a shocking fraud,” the Securities and Exchange Commission says.

Barbara Halpern and her team at Halpern & Associates “raised concerns” about Larry Allen’s “grossly inflated” revenue projections as early as 2011, the SEC says in a new complaint. Nevertheless, they continued to sign off on audits relying on those projections, regulators claim. The Commission is asking for censure, suspension or even revocation of Halpern’s accounting license.

In 2020, a New York Supreme Court justice found “a shocking level of self-dealing, breaches of fiduciary duty, misappropriation of enormous sums… and outright fraud” in Allen’s ACP Investment Group. He ordered Allen’s assets frozen. Last year, the New York Court of Appeals stayed a liquidation order against ACP while Allen’s case pends. The SEC filed an administrative suit against Allen alongside the Halpern complaint. FINRA filed a complaint against Allen and his companies last summer.

Private Funds CFO reported at the time of the NYAG’s lawsuit that the auditor, now known to be Halpern & Associates, had repeatedly asked Allen for third-party valuations, and at one point threatened to issue a qualified audit opinion letter, according to the NYAG. Allen refused them, and even threatened to fire the auditor for its insistence on supporting evidence of the valuations, in one email exchange detailed in the filings. In 2014, Allen allegedly agreed to an independent valuation of ACP in order to mollify the auditor and get it to release its unqualified audit report, but later reneged, and allegedly considered ignoring an LPA requirement to obtain audited financials at all.

The SEC’s case against Allen rests mostly on the New York Supreme Court’s ruling in James’s favor. Allen is appealing the ruling, and if he wins, it may make the SEC’s case moot.

The rarest of them all

SEC cases against internal “gatekeepers” are rare. In fiscal 2021, the Commission filed 434 new enforcement actions, a review of SEC data finds. Thirty-four of them involved lawyers, accountants or broker-dealers for failing to spot alleged violations in their firms.

SEC cases against gatekeepers-for-hire are even rarer. Of those 34 enforcement cases, seven — four auditors and three microcap lawyers — were filed against outside consultants such as Halpern.

SEC cases against private fund gatekeepers are the rarest of them all. Between fiscal 2016 and fiscal 2021, the Commission brought 71 different cases against private fund advisers or their principals. Over the same time, it brought six cases against outside auditors. Until the March 14 complaint against Halpern, the SEC hadn’t filed a case against a private fund auditor in nearly two years, records show.

Gensler’s gamble

Commission Chairman Gary Gensler is betting that the low enforcement numbers mean the accounting industry is keeping it clean. He’s just asked his colleagues to adopt a mammoth book of proposed rules that would require registered private fund advisers to audit their books yearly, and to audit their fees and expenses every quarter.

Officially, the Commission is taking action against Halpern and her firm for the work they did on Allen’s 2015 and 2016 audits. As early as 2011, when she first signed on as Allen’s auditor, though, Halpern was worried about what she saw. The firm told him “each year” to “get an independent valuation” for his fund, because its sales were fizzling, regulators claim, and each year he refused. Allen said he had his own method, what he called the “Fair Valuation Analysis.” Regulators do not seem impressed by it.

“It lacked an objective basis, ignored material information (including two decades of holdings’ operating history), and was based on unachievable future revenue and corporate growth,” the SEC says in its complaint against Halpern. “Allen’s projected revenue growth routinely doubled or tripled year-over-year.”

The Martin Act

In 2011, Allen projected $26 million in revenues. His fund’s holdings were about $2.3 million, regulators claim. Allen “resisted” Halpern’s and her colleagues’ requests for “more … evidence.” Nonetheless, Halpern accountants signed the audits, regulators claim. Neither Halpern, 68, nor anyone at her firm responded to numerous requests for comment.

New York Attorney General Letitia James sued Allen and his funds in late 2019. She said Allen had “looted” APS to prop up his broker-dealer, NYPPEX. James filed her case under New York’s Martin Act. Passed in 1921, the act gives the Empire State’s attorney broad powers to investigate and prosecute securities fraud.

Allen denies James’s accusations, telling Private Fund CFO  at the time that he was being “greenmailed” by an investor in his funds. He claims his New York prosecution is unlawful because the Martin Act is, or ought to be, preempted by federal securities law. The case remains on appeal.

Allen’s attorney, Massimo D’Angelo, couldn’t be reached for comment before deadline.

Importance of consultants

Gensler himself seems well aware of how important outside consultants are to the new proposed regulatory scheme. In an address to the Healthy Markets Association, he said he expected a lot more from gatekeepers.

“The third parties involved in the sale of the securities — such as auditors, brokers, and underwriters,” Gensler said, “should have to stand behind and be responsible for basic aspects of their work.”

Published reports on March 15 claimed that the Commission had opened a wide-ranging investigation into the nation’s four largest accounting firms. Regulators want to know if the firms were keeping audit practices far enough away from their much-more-lucrative consulting practices, the reports claimed.

Comments are already pouring in on Gensler’s audit proposal. Private fund advisers and their advocates are nearly unanimous in their condemnations.

Allen himself has commented on the SEC’s proposal. He signed a February 25 letter on NYPEXX stationary stating that, “In general, we agree with the proposed new rule that advisors to private funds… have a fiduciary and conflict of interest duty to follow both state securities regulations and federal securities regulations, provided however that a state’s securities regulation does not conflict with the federal securities regulation.”