SEC Appoints Receiver for Florida Firm Charged with Fraud

The US Securities and Exchange Commission (SEC) has appointed a receiver to preside over Florida-based investment adviser TCA Fund Management Group Corp. and the funds it manages in order to protect investors from a fraudulent scheme that included the company allegedly inflating asset values and falsifying performance results.

According to the SEC’s complaint, TCA allegedly distributed promotional materials to current and prospective investors that included improperly recognized revenue in order to fraudulently inflate net asset values (NAV) and performance for several funds it managed, which resulted in the funds always reporting positive returns.

“Investors were repeatedly presented a false picture of the TCA funds, showing them to be much more successful than they actually were,” Eric Bustillo, director of the SEC’s Miami regional office, said in a statement. “The SEC sought the appointment of a receiver to help locate and preserve the funds’ remaining assets for the benefit of investors.”

The court granted the SEC’s request to appoint Jonathan Perlman as receiver over TCA’s funds the TCA Global Credit Fund LP, the TCA Global Credit Fund Ltd., and the TCA Global Credit Master Fund LP. A receiver takes possession of all assets of the receivership entities and provides an accounting to the court, and they may establish a procedure by which victims can submit claims and receive a court-approved distribution.

Perlman is a partner at the Genovese Joblove & Battista law firm, where he heads the firm’s receivership, class action, and securities litigation practice groups. He has served as a federal court-appointed receiver in several actions brought by the SEC, the Federal Trade Commission, and the Florida attorney general’s office, and has helped recover millions of dollars for victims of fraudulent schemes.

The SEC alleges that the funds’ reported net asset value of $516 million as of November was inflated by at least $130 million. In addition to allegedly distributing account statements to investors that falsely represented monthly returns and investment balances, the SEC also alleges that the funds paid inflated management fees and performance fees.

The complaint said TCA used two methods to inflate its funds’ asset values and revenue. The first involved TCA Global Credit Master Fund’s lending business. At an early stage of the loan process, a prospective borrower and TCA Global Credit Master Fund would sign a term sheet outlining the terms of the loan, including the amount of fees the borrower would pay the master fund when the loan transactions were consummated.

TCA caused the master fund to recognize these prospective loan fees as revenue at the time of the execution of the term sheet rather than at the closing of the loan, “knowing or being severely reckless in not knowing the term sheets were not binding and in many cases did not lead to a funded loan,” the SEC said in its complaint.

Recognizing the loan fee revenue at the time of term sheet execution artificially increased the master fund’s profits and the NAV, which remained inflated until the fee revenue was actually earned for loans that eventually closed or removed from the books for loans that never closed.

The second method involved agreements for the master fund to provide investment banking services to a company, which provided for the company to pay the master fund a fee for the services, which ranged from hundreds of thousands to millions of dollars. TCA allegedly caused the master fund to recognize the investment banking fees as revenue at the time the agreement was signed, even though the companies lacked the means to pay the fees, and the master fund had provided few if any services to the company at the time the agreement was signed, the SEC said.

“As a result of these practices, defendants caused the funds to report to investors that the funds were profitable every month, with an ever-increasing NAV,” the SEC said in its complaint. “In fact, the booking of loan fees at the time of term sheet execution artificially inflated the NAV—at some points in time by as much as $29 million.”

The SEC’s complaint charges TCA and TCA Global Credit Fund GP Ltd. with violating the antifraud provisions of the federal securities laws and seeks permanent injunctions, disgorgement of allegedly ill-gotten gains with prejudgment interest, and financial penalties.