Is Your Hedge Fund Defrauding You? If So, What Can You Do?

In January of this year, the Securities and Exchange Commission (SEC) published a “Risk Alert” warning potential investors about four areas of concern—ways in which investment advisers are defrauding their clients. Let’s briefly discuss each of these in turn, to see what concerning practices clients should be on the lookout for.

Failure to Act Consistently With Disclosures

The SEC is finding that some advisors are failing to take actions consistent with the material disclosures they have made to clients or investors, such as:

  • disclosing one investment strategy but then using another;
  • failing to follow the required practices in limited partnership agreements (e.g., fail to identify conflicts of interest); or
  • charging them a fee based on the original cost basis of an investment, when they’ve sold, written off, or otherwise disposed of a portion of that investment.
Use of Misleading Disclosures Regarding Performance and Marketing

The SEC takes action after companies that distribute promotional materials and account statements that inflate funds’ returns. Examples of misleading disclosures include: failure to maintain accurate records of the funds’ track records; cherry-picking records that distort the fund’s performance; providing data from incorrect time periods; or mislabeling projected returns as actual performance.

Advisers Fail to Exercise Due Diligence for Investments or Service Providers

Advisers are fiduciaries. As such, they owe their clients a duty of care; they must have a reasonable belief they provide sound advice to their clients. Yet the SEC is finding that some advisers fail to investigate investments before making their recommendations. Some advisers don’t have compliance processes to guide them on what investigation is necessary, while other firms have policies but don’t follow them.

“Hedge Clauses” Are (Probably) Not Enforceable

Finally, the SEC says the use of a “hedge clause” is on the rise in adviser-client contracts. In a “hedge clause,” a client supposedly waives any right to sue the adviser for causes of action that may arise out of state or federal law.

However, the SEC’s position is that, since advisers have a fiduciary duty to their clients, they should not be able to use contracts to protect themselves if they breach that duty. Just having such a clause in a contract may be considered fraud under the securities laws, because it would falsely suggest to clients they have no recourse against overcharging advisors.  

Hedge Fund Attorneys

Our securities and investment fraud attorneys can help determine the best way for you to report the miconduct and to help victims recover their hedge fund losses

If you are concerned that your hedge fund may be defrauding you, the experienced attorneys at Silver Law Group and the Law Firm of David R. Chase are here to help. For a free, confidential consultation, email us or call us today at (800)975-4345.