SEC settles with investment adviser for taking warrants paid by hedge fund clients
The Securities and Exchange Commission has announced an enforcement action against Los Angeles-based investment adviser M.A.G. Capital and its president and sole owner, David F. Firestone, for taking warrants from three hedge funds that M.A.G. advises without compensating the funds for them.
M.A.G. and Firestone agreed to settle the SEC's charges, without admitting or denying the findings, by agreeing to a censure, a cease-and-desist order, and financial penalties of USD100,000 and USD50,000, respectively. The settlement reflects the co-operation of M.A.G. and Firestone, including the return of all warrants and the proceeds from all warrants sold.
"This enforcement action demonstrates that the Commission takes very seriously the fiduciary obligations of hedge fund managers to their clients," says Rosalind R. Tyson, director of the SEC's Los Angeles regional office.
Generally, a warrant is a type of security that gives an investor the opportunity to purchase securities from an issuer at a certain price within a specified time frame. According to the SEC's order, M.A.G. took warrants from the hedge funds on 44 separate occasions between May 2003 and September 2006 without compensating the funds for them.
The funds had purchased the warrants and other securities in PIPE (private investment in public equity) transactions. As part of these transactions, M.A.G. took, as compensation for itself, warrants that were being paid for by its clients, the funds.
M.A.G. did not adequately disclose that the warrants it took were being paid for by the hedge funds and that M.A.G. was not compensating the funds for these warrants, whose net value was approximately USD18.9m. Firestone instituted the warrant-taking practice and knew that M.A.G. did not compensate the funds for the warrants that it took.
M.A.G. and Firestone consented to the issuance of an order that censures them and orders them to cease and desist from committing or causing violations and any future violations of Section 206(2) of the Investment Advisers Act, and to pay their respective financial penalties.
The regulator considered remedial acts promptly undertaken by M.A.G. and Firestone and the cooperation they afforded the SEC staff in the investigation.
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