A recent SEC case shows, once again, there is a fine line between committing outright fraud and violating marketing rules that managers must be aware of.
TL;DR: verify all performance claims.
This month, fraud charges were brought to CMI Capital LLC, run by Michael D. Williams (under the business name Check Mate Investments) for violating the antifraud and registration provisions of the Securities Act of 1933, the antifraud provisions of the Securities Exchange Act of 1934, and the Investment Advisers Act of 1940.
It is alleged that Williams raised around $860,000 from a minimum of 18 investors – many of whom were law enforcement officers in South Florida – by falsely presenting fund performance.
As the complaint notes, investors were told that Williams’ funds held a portfolio worth more than $5 million, and generated returns exceeding 140%. Whatsmore, the evidence to ‘prove’ this to prospects consisted of cropped screenshot graphics taken from trading platforms, which showed outsized profits and limited the full scope of the story; only “one of the tactics the defendants used to trick investors,” says Stephanie N. Moot, Director of the SEC’s Miami Regional Office.
The regulator also states that around $384,000 of the raised money was for personal expenses – vacations, a new car and credit card bills – with over $375,000 later returned to some investors. A bifurcated settlement including disgorgement, civil penalties an associational bar against Williams has been agreed to, subject to court approval.
So, what does this mean for fund marketers?
As this case shows, pulling graphics for marketing purposes is a regulatory breach. Any manipulated visuals are cause for concern, and can be as serious as falsely presenting performance claims, meaning IRs and fund marketers should take stock of their formal marketing documents to avoid any potential missteps.
For one, know that selectively-framed graphics are fraudulent. Any image that shares account statements or performance charts should go through the same compliance checks as any factsheet or pitch deck, as any picture cropped to hide anything from investors can kickstart a fraud charge.
Performance must be verified, and if claimed returns cannot be tied to a full auditable record, investors must not see it at all. This applies to every fund, including those that raise from small investor pools as well as large, registered advisors.
Charges brought against a firm (before penalties are finalised) are public and searchable. Any immediate reputational damage can be devastating, and exactly why compliance and marketing teams’ co-existence and coordination is vital for treading the right line of regulatory scrutiny.
Source
U.S. Securities and Exchange Commission, SEC Charges South Florida Resident and His Company for Alleged Investment Scheme Defrauding Law Enforcement
