Advisers Fined for Failure to Fully Disclose Relationship with "Activist Short" Publishers

Two investment advisers settled SEC charges for failing to disclose to investors the firm's relationship with activist short publishers and inaccurately recording payments made to the publishers.  

According to the Order, the SEC found that the advisers worked with activist short publishers who issued "reports presenting bearish views of target securities." The SEC said that the advisers did not disclose to investors that the firm's "investment strategy involved working with activist short publishers and trading in the target securities, including around the time the reports were issued by activist short publishers, and paying a portion of [the firm's] trading profits to the short publishers in exchange for the short publishers sharing their work with [the firm] in advance of posting it publicly." Further, the SEC found that the advisers agreed to pay the short publishers "a share of [flagship fund's] trading profits" from short positions based on the "bearish reports and tweets on two securities." The SEC also found that these payments were inaccurately recorded as "research services," when in fact they were shares trading profits.

The SEC determined that the advisers violated Advisers Act Sections 204 ("Reports by investment advisers") and 206(4) ("Prohibited transactions by investment advisers") and Rules 204-2 ("Books and records to be maintained by investment advisers"), 206(4)-7 ("Compliance procedures and practices") and 206(4)-8 ("Pooled investment vehicles").

To settle the charges, the investment advisers agreed to (i) cease and desist from committing violations of the Advisers Act, (ii) a censure and (iii) pay civil money penalties in the amount of $1,250,000 and $1,000,000, respectively.