Florida-based fund administrator Theorem Fund Services has settled SEC charges that it failed to respond to red flags relating to a fraud against a private fund that it managed, and its investors.
According to the SEC’s order, Theorem Fund Services and its owner Andrew Middlebrooks allegedly engaged in a scheme that included misappropriating and misusing investors’ funds during a five-year period. The SEC alleged that TFS, which provided administration services to the EIA All Weather Alpha Fund I, a fund managed by EIA All Weather Alpha Fund Partners, materially overstated the value of their investments.
The SEC said that during TFS’ tenure as the fund’s administrator that the fund suffered “significant losses” due to trading by EIA and Middlebrooks. However, the SEC alleged that TFS, at the direction of EIA and Middlebrooks, did not recognize the losses when calculating its net asset value, and sent investors account misleading statements. This allegedly included monthly investor capital account statements that were distributed by TFS through its online portal.
Instead of accounting for the losses, TFS allegedly recognized an expense reimbursement as a receivable due from EIA, an asset of the fund, which offset the effect of the losses. As a result, there was no decrease to the fund’s NAV. The SEC alleged that TFS recorded this asset to the financial statements without evaluating whether it was appropriate and despite the existence of “red flags.”
The firm then used the dubious NAV in its investor statements, which materially overstated the value of the investors’ investments, the SEC said. The regulator also says that the overstated returns caused certain investors to increase their investments in the fund.
“These investor statements represented positive returns in the investors’ accounts and ever-increasing account balances based on purported fund gains from trading,” the SEC said in its order. “In reality, the purported gains reflected in the investor statements were false because the fund, and therefore the investors, had actually lost money.”
Citing TFS’ records, the SEC said the fund grew from one investor to 14 investors and that it received more than $1.6 million in investor money.
Without admitting or denying the SEC’s findings, TFS agreed to a cease-and-desist order, and agreed to pay a civil penalty of $100,000, in addition to disgorgement of $18,000 and prejudgment interest of $4,271.
“Fund administrators are important gatekeepers in the private fund space,” said Andrew Dean, co-chief of the SEC Enforcement Division’s Asset Management Unit, in a release. “Here, TFS failed to live up to its gatekeeper responsibilities and distributed inaccurate account statements to investors despite clear red flags.”