SEC Roundup: $62M Securities Fraud Award Against Ex-Lancer Group Hedge Fund Manager Stands, Investment Management Division Adopts Risk-Based Approach to Regulatory Initiatives, & Conflicts of Interest Areas Now Are Priority

The US Supreme Court has decided not to review a ruling by the U.S. Court of Appeals for the Eleventh Circuit affirming a $62M award against Michael Lauer, an ex-Lancer Group Hedge Fund manager, in the securities lawsuit filed against him by the Securities and Exchange Commission. The federal appeals court had said that the district court’s decision granting the Commission’s motion for summary judgment on liability and remedies was proper.

Per the SEC fraud lawsuit, Lauer is accused of misrepresenting the hedge funds’ true value by artificially inflating the value of holdings found in shell companies that were thinly traded. The Commission contends that he hid his scam by making false statements in investor newsletters, private placement memoranda, and phone calls. (Lauer has since been acquitted of related criminal charges.)

In his certiorari petition filed earlier, Lauer argued that federal court couldn’t strike a defendant’s motion to dismiss due to lack of subject matter jurisdiction without evaluating whether it had such jurisdiction. He also claimed that the appeal’s court ruling that the district court’s decision was grounded in enough evidence was not de novo review.

In other SEC news, Norm Champ, the director of the Division of Investment Management, said the group is now employing a risk-based approach to regulatory initiatives. He said that this approach resembles what the SEC’s Office of Compliance Inspections and Examinations uses for examinations. Champ made his statements during a teleconference at an American Law Institute-Continuing Legal Education Group-organized conference on life insurance company products. He said that the views he was expressing are his own.

Champ noted that the division, which he took charge of a few months ago, has been choosing its priorities, focusing, in particular, on the SEC’s objectives to protect investors, allow for capital formation, and keep up efficient and fair markets. The potential impact of the respective regulatory initiatives is also being addressed.

Champs also spoke about the division’s new Risk and Examination Group. (The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act had required the division to retain its own examiners). The group who will work with risk personnel to better determine the risks that the investment management industry must contend with and where further efforts should be focused.

Meantime, Office of Compliance Inspections and Examinations director Carlo di Florio says the SEC’s National Exam Program is making conflicts of interest a key area of concentration. Speaking to the National Society of Compliance Professionals, di Florio talked about a number of these priority conflict areas, including portfolio management, compensation, broker-dealer and investment adviser affiliations, valuation, exchanges, and transfer agents.

Regarding the issue of compensation, di Florio said that staff was looking at where retail customers’ interests may have become a lower priority compared to financial incentives for representatives. The subject of portfolio management brought up the question of whether there may be situations in which an investment advisor might have incentive to favor one client over another. As for conflicts of interest related to valuation, the staff is considering whether investment advisers or broker-dealers might have incentives for giving relatively illiquid positions high marks and/or inflating valuations so they can charge additional fees and bring in investors. The topic of exchanges compelled staff to consider whether there might be some line blurring occurring between SRO regulatory and business functions.

SEC Division of Investment Management Director Norm Champ’s Remarks, SEC, November 1, 2012

Read Office of Compliance Inspections and Examinations’s Director’s Carlo di Florio’s Remarks, SEC, October 22, 2012

More Blog Posts:

Louisiana-Based Hedge Fund Manager Charged by SEC with Securities Fraud Related for Allegedly Concealing RMBS Losses, Stockbroker Fraud Blog, November 8, 2012