Misleading Marketing Materials: SEC Enforcement Lessons for Hedge Fund and Private Equity Firms

In two recent enforcement actions involving a hedge fund manager and a private equity sponsor, the SEC found violations of the Investments Advisers Act as a result of misleading information provided to investors in private fund marketing presentations.

In the Matter of Everest Capital LLC and Marko Dimitrijevic (April 30, 2020): Everest Capital Global Fund (the Fund), a hedge fund with AUM of $830 million at peak, was liquidated following losses sustained in January 2015 after shorting the Swiss Franc, which rose more than 30% in one day. While the SEC’s press release describes “misconduct relating to risk management,” the enforcement action is framed as a disclosure violation resulting from misleading information provided to investors in the Fund’s marketing materials.

  • Gross Exposure: Gross exposure numbers in Fund marketing presentations carved out currency positions without disclosing this fact. As a result, the Fund’s gross exposure was represented as ranging between 155 – 185% during the relevant period, when in fact it was over 1300%.
  • Concentration Limits: In addition, the marketing materials provided that the Fund “would not take concentrated positions in any single geographic region,” highlighting the lessons learned by Everest’s portfolio manager from taking concentrated bets on Russian investments in 1998. In fact, the Fund’s gross exposure to the Swiss Franc alone ranged from 400 – 900% during the relevant period.
  • Risk Management: The Fund’s marketing materials also described the ability of Everest’s risk team “to reduce risk independent of the investment team,” but in fact the risk team had no such authority with respect to the Fund’s currency positions. On this point, the SEC further points to the Fund’s offering memorandum, which “did not exclude currencies from the [firm’s] ‘extensive research and risk management.’”

In the Matter of Old Ironsides Energy, LLC (April 17, 2020): The Old Ironsides team formerly made energy investments for a Fortune 100 company and spun out in 2013 to become an independent energy private equity firm, with AUM of approximately $1.75 billion.  The firm was fined $1 million for mischaracterizing an investment in the team’s legacy portfolio, which formed part of the track record included in marketing materials distributed to investors.

  • In calculating the firm’s track record included in marketing materials distributed to potential investors in Old Ironsides Energy Fund II LP (Fund II), the firm described a large, profitable legacy investment made in 2002 as a direct oil and gas investment. In fact it was an investment in another private fund managed by a third party over whose investment decisions the team had only certain voting rights, along with other investors in that fund.
  • By including that private fund investment as a direct investment (specifically categorized as “early stage”), the firm improved the legacy portfolio’s track record in such investments, which would be one of three investment types on which Fund II would focus. Further, the SEC highlights that Fund II’s mandate expressly excluded investments in other private funds.