Posted by Michael Heaton on 05/09/2016

According to an SEC press release, the agency filed 807 enforcement actions in the previous fiscal year and obtained orders totaling approximately $4.2 billion in disgorgement and penalties.

Of the 807 enforcement actions filed in fiscal year 2015, a record 507 were independent actions for violations of the federal securities laws and 300 were either actions against issuers who were delinquent in making required filings with the SEC or administrative proceedings seeking bars against individuals based on criminal convictions, civil injunctions, or other orders.

The types of enforcement actions brought in 2015 may provide insight on the types of cases we are likely to see in 2016.


In a recent case, the SEC charged an Albany, N.Y.-based hedge fund advisory firm with engaging in prohibited principal transactions and then retaliating against the employee who reported the trading activity to the SEC.   This is the first time the SEC has filed a case under its new authority to bring anti-retaliation enforcement actions.  The SEC also charged the firm’s owner with causing the improper principal transactions. 

Paradigm Capital Management and owner Candace King Weir agreed to pay $2.2 million to settle the charges.

According to the SEC’s order instituting a settled administrative proceeding, Weir conducted transactions between Paradigm and a broker-dealer that she also owns while trading on behalf of a hedge fund client.  Such principal transactions pose conflicts between the interests of the adviser and the client, and therefore advisers are required to disclose that they are participating on both sides of the trade and must obtain the client’s consent.  Paradigm failed to provide effective written disclosure to the hedge fund and did not obtain its consent as required prior to the completion of each principal transaction.


Regulation S-P violations and inadequate policies and procedures were the focus of the SEC enforcement action against R.T. Jones Capital Equities Management. The St. Louis-based investment adviser agreed to settle charges that it failed to establish the required cybersecurity policies and procedures in advance of a breach that compromised the personally identifiable information (PII) of approximately 100,000 individuals, including thousands of the firm’s clients.  

The SEC investigation found that R.T. Jones violated this “safeguards rule” during a nearly four-year period when it failed to adopt any written policies and procedures to ensure the security and confidentiality of PII and protect it from anticipated threats or unauthorized access.

According to the SEC’s order instituting a settled administrative proceeding:

  • R.T. Jones stored sensitive PII of clients and others on its third party-hosted web server from September 2009 to July 2013.
  • The firm’s web server was attacked in July 2013 by an unknown hacker who gained access and copy rights to the data on the server, rendering the PII of more than 100,000 individuals, including thousands of R.T. Jones’s clients, vulnerable to theft.
  • The firm failed entirely to adopt written policies and procedures reasonably designed to safeguard customer information.  For example, R.T. Jones failed to conduct periodic risk assessments, implement a firewall, encrypt PII stored on its server, or maintain a response plan for cybersecurity incidents.
  • After R.T. Jones discovered the breach, the firm promptly retained more than one cybersecurity-consulting firm to confirm the attack, which was traced to China, and determine the scope.
  • Shortly after the incident, R.T. Jones provided notice of the breach to every individual whose PII may have been compromised and offered free identity theft monitoring through a third-party provider.
  • To date, the firm has not received any indications of a client suffering financial harm as a result of the cyber attack.

Private Equity Fees & Expenses

In the first case of its kind, the SEC brought an enforcement action against Kohlberg Kravis Roberts & Co. (KKR) with misallocating more than $17 million in so-called “broken deal” expenses to its flagship private equity funds in breach of its fiduciary duty. KKR agreed to pay nearly $30 million to settle the charges, including a $10 million penalty.

The SEC Enforcement Division’s Asset Management Unit has scrutinized fund manager fees and expenses to ensure they are not misallocations or unfair charges to investors.  An SEC investigation found that during a six-year period ending in 2011, KKR incurred $338 million in broken deal or diligence expenses related to unsuccessful buyout opportunities and similar expenses.  Even though KKR’s co-investors, including KKR executives, participated in the firm’s private equity transactions and benefited from the firm’s deal sourcing efforts, KKR did not allocate any portion of these broken deal expenses to any of them for years.  KKR did not expressly disclose in its fund limited partnership agreements or related offering materials that it did not allocate broken deal expenses to the co-investors.

Fund Valuation

The SEC charged a Greenwich based investment advisory firm and its two owners with fraudulently inflating the prices of securities in hedge fund portfolios they managed.

An SEC investigation found that AlphaBridge Capital Management told investors and its auditor that it obtained independent price quotes from broker-dealers for certain unlisted, thinly-traded residential mortgage-backed securities.  AlphaBridge instead gave internally-derived valuations to broker-dealer representatives to pass off as their own.  The inflated valuation of these assets caused the funds to pay higher management and performance fees to AlphaBridge.

AlphaBridge and its owners Thomas T. Kutzen and Michael J. Carino agreed to pay $5 million combined to settle the charges.

Performance Advertising

Virtus Investment Advisers, a Hartford based investment management firm, agreed to pay $16.5 million to settle charges that it misled mutual fund investors and others with advertisements containing false historical performance data about AlphaSector, a major exchange-traded fund (ETF) portfolio strategy.

An SEC investigation found that Virtus Investment Advisers publicized a substantially overstated performance track record as received from F-Squared, which it hired as a subadviser for mutual funds and other clients that followed F-Squared’s AlphaSector strategy.  Virtus falsely stated in client presentations, marketing materials, SEC filings, and other communications that the AlphaSector strategy had a performance history dating back to April 2001 and outperformed the S&P 500 Index for several years.  In a separate SEC enforcement action last year, F-Squared admitted to touting a track record it presented as real when it was actually hypothetical and backtested, and these calculations also were inflated.