FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
The Securities and Exchange Commission announced charges against a former hedge fund manager accused of fraudulently taking excess management fees from the accounts of fund clients and using their money to remodel his multi-million dollar home and buy a Porsche.
An SEC Enforcement Division investigation found that Sean C. Cooper improperly withdrew more than $320,000 from a hedge fund he managed for San Francisco-based investment advisory firm WestEnd Capital Management LLC. While WestEnd disclosed to clients the withdrawal of annual management fees of 1.5 percent of each investor’s capital account balance, Cooper actually withdrew amounts that far exceeded that percentage. He then transferred the money to personal bank accounts so he could spend it freely. Cooper’s misconduct occurred for a two-year period until he ceased misappropriating fund assets when the SEC began an examination of WestEnd in April 2012.
WestEnd, which expelled Cooper and reimbursed the hedge fund once it became aware of his scheme, is being charged separately by the SEC for failing to effectively supervise him. The firm agreed to pay a $150,000 penalty to settle the SEC’s charges.
“Cooper betrayed the hedge fund’s investors by lining his own pockets with fund assets that he had not earned,” said Marshall S. Sprung, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “His fraud went undetected because WestEnd had no internal controls to limit Cooper’s ability to withdraw excessive amounts from the fund.”
According to the SEC’s order instituting a litigated administrative proceeding against Cooper, he began indiscriminately withdrawing money from the hedge fund – WestEnd Partners L.P. – in March 2010. Cooper mischaracterized the withdrawals as management fees in the fund’s books and records, but they bore no relation to the actual amount of fees that WestEnd had earned. The SEC Enforcement Division alleges that, in reality, Cooper simply was using the hedge fund as his own private bank. He had sole authority to transfer money out of the fund, and there were no controls in place at the firm to prevent him from making improper withdrawals. Once he routed the money into his personal accounts, Cooper purchased a $187,000 Porsche amid other lavish spending.
The SEC Enforcement Division alleges that Cooper, a resident of New Orleans, willfully violated Sections 206(1), 206(2), 206(4), and 207 of the Investment Advisers Act of 1940 and Rule 206(4)-8. Cooper is charged with aiding, abetting and causing WestEnd’s violations of Section 206(4) and Rule 206(4)-7.
According to the SEC’s order instituting a settled administrative proceeding against WestEnd, Cooper operated the hedge fund with little to no supervision from others at WestEnd, and he had sole discretion to calculate and wire out money that he claimed the fund owed to WestEnd. Besides its failure to adopt any policies or procedures that imposed the necessary internal controls, WestEnd also failed to maintain several required books and records relating to its finances, including the management fees it collected from the fund.
WestEnd consented to the entry of the order finding that it violated Sections 204, 206(4), and 207 of the Advisers Act and Rules 204-2(a)(1), (2), (6), and (7) and 206(4)-7. The order also finds that WestEnd failed to reasonably supervise Cooper within the meaning of Section 203(e)(6) of the Advisers Act. In addition to the financial penalty, WestEnd agreed to cease and desist from committing or causing future violations of these provisions without admitting or denying the findings. The settlement also requires the firm to retain a compliance consultant.
The SEC’s investigation was conducted by Eric Brooks and Erin E. Schneider of the Asset Management Unit in the San Francisco Regional Office. The SEC’s litigation against Cooper will be led by Sheila O’Callaghan and Mr. Brooks. The SEC examination that led to the investigation was conducted by Ed Haddad, John Chee, Karah To, and Arturo Hurtado of the San Francisco office’s investment adviser/investment company examination program.