DOL Sues Investment Adviser for Receiving Undisclosed Fees from Hedge Fund

The case below provides a great example of why registered investment advisors and hedge funds need to have competent legal counsel advising them on all aspects and arrangements of their business.  Basically a registered investment advisor (RIA) had a selling arrangement with a hedge fund where the RIA would receive a portion of the performance fees earned by the fund on those assets which the RIA directed to the fund.  The RIA directed ERISA assets and did not disclose the arrangement with the hedge fund.  The DOL is seeking remedial action on many fronts and is asking that the RIA be banned from acting as a fiduciary to ERISA assets in the future.  The SEC has also frozen the hedge fund’s asset.

I am actually shocked by this story.  Not because of what the RIA or the fund did, but because it actually happened.  I would assume that an RIA with over $500 million in assets (including ERISA assets) would have an attorney review all of the transactions which it contemplated.  I am also in disbelief that the hedge fund manager did not run the proposed transaction through its own attorney.  If an attorney had seen this transaction in proposed form, it would not have gone through.  In addition to the potential ERISA issues, there are potential broker-dealer issues for the RIA as it is essentially acting as a broker in this transaction and if the firm is not registered as a broker, there may be more issues the RIA will have to face with the SEC.

This case highlights the importance of having competent legal counsel and discussing all issues and proposed transactions with counsel on a regular basis.  The consequences are real and severe – the fund’s assets are frozen and now both of these firms have sullied names.  The press release can be found here.

Release Date: October 24, 2008
Release Number: 08-1536-SAN
Contact Name: Gloria Della/Richard Manning
Phone Number: 202.693.8664/202.693.4676

U.S. Labor Department sues California investment advisor and executives to recover losses and hidden fees charged to employee benefit plans

San Francisco – The U.S. Department of Labor has sued Zenith Capital LLC of Santa Rosa, California, and its executives for allegedly investing the assets of 13 retirement plan clients in the hedge fund Global Money Management LP while receiving undisclosed incentive fees from the hedge fund’s sponsor and manager.
The lawsuit alleges that Zenith Capital and executives Rick Lane Tasker, Michael Gregory Smith and Martel Jed Cooper violated their fiduciary obligations under the Employee Retirement Income Security Act (ERISA). The defendants allegedly made investment decisions for their ERISA plan clients. From April 1999 to September 2003, the defendants caused the plans to invest in Global Money Management and received undisclosed incentive fees from LF Global Investments LLC, the general partner and manager of Global Money Management.

In 2004, Zenith Capital LLC was a registered investment advisor with 1,214 clients and approximately $538 million in assets under management. In addition to paying Zenith incentive fees not disclosed to the 13 ERISA plan clients, LF Global held an ownership interest in Zenith. The U.S. Securities and Exchange Commission has frozen the remaining assets of Global Money Management and secured the appointment of a receiver.

The Labor Department’s suit seeks a court order requiring the defendants to restore all losses owed to the plans, requiring them to undo any transactions prohibited by law and permanently barring them from serving in a fiduciary or service provider capacity to any employee benefit plan governed by ERISA. The suit was filed in the U.S. District Court for the Northern District of California.

“We will vigorously pursue investment advisors who try to line their own pockets by illegally steering pension investments. Fiduciaries must invest solely in the interests of the workers to whom these funds ultimately belong,” said Bradford P. Campbell, assistant secretary for the Labor Department’s Employee Benefits Security Administration (EBSA).

The suit resulted from an investigation conducted by the San Francisco Regional Office of EBSA as part of EBSA’s Consultant Adviser Project. Employers and workers may contact EBSA’s San Francisco office at 415.625.2481 or toll-free at 866.444.3272 for help with problems relating to private sector pension and health plans. In fiscal year 2007, EBSA achieved monetary results of $1.5 billion related to pension, 401(k), health and other benefits for millions of American workers and their families.

Zenith Capital LLC, Civil Action Number C-08-4854 (EMC)

U.S. Department of Labor news releases are accessible on the Department’s Newsroom page. The information in this news release will be made available in alternate format (large print, Braille, audio tape or disc) from the COAST office upon request. Please specify which news release when placing your request at 202.693.7828 or TTY 202.693.7755. The Labor Department is committed to providing America’s employers and employees with easy access to understandable information on how to comply with its laws and regulations. For more information, please visit the Department’s Compliance Assistance page.

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