A Compilation of Enforcement and Non-Enforcement Actions

24 July 2009 Publication
Authors: Peter D. Fetzer Terry D. Nelson

Legal News: Investment Management Update

Non-Enforcement Matters

Treasury Proposes Legislative Overhaul of Hedge Fund Regulation
The Obama administration, acting through the U.S. Department of Treasury (Treasury), recently proposed new legislation on hedge funds. This proposal joins several other bills in the Senate and the House on the same topic. The bill proposed by the Treasury, however, is likely to be the lead bill on hedge fund regulation.

Under the Treasury’s proposal, for the first time, investment advisers with greater than $30 million in assets under management must register with the U.S. Securities and Exchange Commission (SEC). Under current law, many of the hedge fund advisers, regardless of the amount of assets under management, avoid SEC investment adviser registration by having fewer than 14 clients in any 12-month period. Each private fund managed by the adviser counts as only one client. If the Treasury’s proposal becomes law, the hedge fund adviser would not be able to rely on this exemption from registration if the fund has $30 million or more of assets under management.

The effect of registering with the SEC is that investment advisers will be subject to reporting requirements to the SEC and, of course, periodic on-site examinations by SEC staff examiners. Moreover, registration with the SEC will lead to disclosure requirements for investors and creditors alike.

The proposed legislation will require confidential disclosure to the SEC of information about a fund’s assets, leverage, and off-balance sheet exposure. The SEC will analyze that information less on an individual-adviser level and more on an aggregate level. In fact, the SEC and the Federal Reserve Board of Governors (Fed) will use these disclosures to detect systematic risks facing the national and global economies. That macroeconomic oversight is in accordance with the Obama administration’s plan to create a watchdog for national and global macroeconomic risks as outlined in the June 2009 edition of Legal News: Investment Management Update, available online at http://www.foley.com/publications/pub_detail.aspx?pubid=6135.

The legislation will now face congressional committees and the amendment process. However, Democratic congressional leaders, who hold majorities in both chambers of Congress, have indicated their support of the regulatory overhaul. Although Congress will have a lot on its plate for the rest of this year (namely, a confirmation vote for a Supreme Court nominee, health care reform, and energy reform), many congressional insiders believe Congress may yet take up the matter this year as well.

CalPERS Files Suit Against Credit-Rating Agencies
The California Public Employees’ Retirement System (CalPERS), the largest state pension fund in the country, filed suit this month, claiming “perhaps more than $1 billion” in investment losses due to misrepresentations by credit-rating agencies. The defendants in the case are the three major credit-rating agencies: Moody’s Investors Services Inc., Standard & Poor’s, and Fitch, Inc.

CalPERS alleges the credit-rating agencies violated California state law, but CalPERS brought no charges pursuant to federal law. According to the complaint, the rating agencies gave three structured investment vehicles (SIVs) the highest rating assigned by each of the respective agencies. The three SIVs were heavily composed of subprime mortgages in the form of mortgage-backed securities, collateralized debt obligations, and securitized home equity loans. According to CalPERS, despite risks inherent in these SIVs and known to the rating agencies, the rating agencies gave the SIVs an inflated rating. CalPERS avers that this rating was a violation of California law. The complaint also alleges the rating agencies’ involvement in the structured finance market created a conflict of interest and was a factor in CalPERS’ loss of upwards of $1 billion.

A spokesperson for Moody’s was the only one of the defendants who immediately responded to the press about the complaint. According to the Moody’s spokesperson, it has “strong defenses” to the CalPERS’ action and “will seek to dismiss the complaint at the earliest appropriate opportunity.”

Enforcement Matters

SEC Files Complaint Against Omaha, Nebraska Investment Adviser
Ryan M. Jindra was the principal of Envision Investment Advisors, LLC (Envision), a Nebraska-based registered investment adviser. The SEC recently filed a complaint against Mr. Jindra and Envision, alleging an ongoing fraud related to Envision’s advisory fees. According to the complaint filed by the SEC, Envision fraudulently deducted fees from numerous client accounts. Envision and Mr. Jindra then allegedly used the fraudulently obtained fees (about $773,000) to cover Envision’s debts, to pay off previously defrauded clients, and to pay for Mr. Jindra’s personal expenses.

The SEC already obtained emergency relief in the form of a temporary restraining order as well as freezing the assets of Mr. Jindra, Envision, and Envision’s parent company. The SEC also is asking the federal district court in Omaha to disgorge Envision of its allegedly fraudulently received fees, together with holding Envision and Mr. Jindra liable for civil penalties, permanent injunctions, and pre-judgment interest on the allegedly fraudulently obtained advisory fees.

SEC Files Complaint Against Chula Vista, California Investment Advisers
Recently, the SEC filed charges against a California resident, Moises Pacheco, and two entities that he controls, Advanced Money Management, Inc. (AMM) and Business Development & Consulting Co. (BD&C). According to the SEC’s complaint, AMM and BD&C acted as investment advisers to five purported hedge funds. Mr. Pacheco told potential investors he had developed an investment strategy to exploit profits from the purchase and sale of covered call options. He claimed he would generate returns of roughly 40 percent annually. Mr. Pacheco’s strategy was successful, at least in that he raised more than $14.7 million from more than 200 investors from January 2005 to June 2008.

Unfortunately, Mr. Pacheco’s strategy was less successful when it came to actually turning a profit, according to the SEC complaint. Mr. Pacheco did not generate the returns he claimed he would be able to generate; in fact, according to the SEC complaint, he was not even able to generate the 2.5 percent profit that he told investors the funds were making. Instead, the funds were only making about a one percent return on investment, according to the SEC.

Strapped for much-needed cash for distributions to investors, Mr. Pacheco allegedly began using investor principal to make profit distributions in a Ponzi-like scheme. The SEC alleged Mr. Pacheco, AMM, and BD&C violated the antifraud and registration provisions of federal securities laws. The SEC has requested that the federal district court for the Southern District of California disgorge Mr. Pacheco, AMM, and BD&C of all ill-gotten gains, together with prejudgment interest, and permanently enjoin the parties from acting as investment advisers. The SEC also is seeking civil penalties for each of Mr. Pacheco, AMM, and BD&C.

Legal News: Investment Management Update is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues. If you have any questions about this update or would like to discuss these topics further, please contact your Foley attorney or the following:


Terry D. Nelson
Madison, Wisconsin

Joseph D. Shumow
Madison, Wisconsin

Peter D. Fetzer
Milwaukee, Wisconsin