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July 13, 2020

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SEC Obtains Consent Judgment against Hedge Fund Adviser for Alleged Scheme to Increase Profits above High-Water Mark

On September 13, 2018, the United States District Court for the Northern District of Georgia entered a consent order against Hope Advisors, LLC (Hope) and its principal in connection with trading activities allegedly designed to increase incentive payments from two hedge funds managed by Hope.

According to the SEC’s complaint filed on May 31, 2016, the firm managed two hedge funds in which the only compensation was an incentive fee, calculated as a share of the profits earned in the funds’ accounts each month. This fee was subject to a high-water mark—i.e., whereby the fee is earned for a given month only to the extent that the funds’ profits exceed losses from previous monthly periods. The SEC alleged that between October 2014 and June 2016, Hope and its principal engaged in a continuous pattern of trading to inflate their incentive fee by structuring trading so that a profit would be realized at the end of the month, while deferring the realization of losses until the following month. The SEC claimed that these trades did not produce any actual profits for the funds but, rather, were designed solely to manipulate the high-water mark and generate incentive fees. According to the SEC, the firm and its principal would have earned almost no incentive fees but for the allegedly fraudulent trading patterns.

The consent judgment orders Hope and its principal to pay $1,237,235 in disgorgement and $250,000 in civil penalties, and enjoins the parties from further violation of the securities laws.

The SEC litigation release about the matter is available at: https://www.sec.gov/litigation/litreleases/2018/lr24285.htm

© 2020 Vedder PriceNational Law Review, Volume VIII, Number 296


About this Author

Vedder Price P.C. attorneys provide a full range of services to a diverse financial services clientele. Attorneys practicing in the firm’s Investment Services Group are experienced in all aspects of investment company and investment adviser securities regulations, broker-dealer regulatory and compliance matters, derivatives and financial product matters, and ERISA and tax matters. Clients include mutual fund complexes, hedge and other private funds, money managers, broker-dealers, independent directors, and many other types of institutions such as banks, savings and loans,...