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SEC Settles with Mutual Fund Administrator in Connection with Calculation of Inflated Net Asset Value

Pursuant to an order dated January 22, 2018 (the Order), the SEC assessed a civil monetary penalty of $400,000, in addition to other penalties, against Gemini Fund Services, LLC (Gemini), administrator to the GL Beyond Income Fund (the Fund), in settlement of allegations that Gemini struck an inflated net asset value (NAV) for the Fund under circumstances in which Gemini did not have adequate proof of the existence of certain Fund assets. The administrative proceeding concerning Gemini follows a separate civil securities fraud action by the SEC against the Fund’s investment adviser, GL Capital Partners, LLC (GL Capital), and its principal, Daniel Thibeault, for the creation of fictitious loans that were included as assets of the Fund when Gemini struck the Fund’s NAV. From January 2012 through December 2014, Gemini was responsible for calculating the Fund’s NAV, transmitting the NAV to Nasdaq and performing data reconciliation with the Fund’s custodian.

According to the Order, Thibeault began misappropriating money from the Fund’s investors in February 2013 by creating fictitious loans, using the names and personal information of family and friends as purported borrowers. The Order states that Thibeault caused the Fund’s custodian to disburse the proceeds of the fake loans, which were diverted to his personal and business bank accounts.

The Order also states that although Gemini did not know that the loans were fake when it struck the Fund’s NAV, Gemini personnel allegedly knew—through the performance of contractually required reconciliation processes with the Fund’s custodian—that “for extended periods of time,” the Fund’s custodian did not have adequate proof of the loans’ existence. The Order notes that the custodian was not counting the loans as Fund assets during the time that Gemini was striking a NAV that included those same assets, and that the Fund’s claimed assets exceeded the assets reflected in the custodian’s records by as a much as $6.8 million. According to the Order, Gemini neither notified the investing public or the Fund’s board that the custodian did not have proof of the validity of the assets nor reduced the Fund’s NAV to reflect the problem.

The Order states that Gemini “was a cause of Thibeault’s and GL Capital’s violations” of Section 206(1) of the Investment Advisers Act of 1940, which prohibits any investment adviser from employing any device, scheme or artifice to defraud any client or prospective client, and Section 206(2) of the Advisers Act, which prohibits any investment adviser from engaging in any transaction, practice or course of business that operates as a fraud or deceit upon any client or prospective client.

In addition to the $400,000 civil monetary penalty, the SEC ordered Gemini to pay $147,334 in disgorgement and $14,072 in prejudgment interest, enjoined Gemini from committing or causing any future violations and required Gemini to retain an independent compliance consultant and adhere to the recommendations and findings of the consultant’s report.

© 2018 Vedder Price

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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,...

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