The Securities and Exchange Commission has charged a San Diego-based investment advisory firm and its president with fraud for failing to disclose a conflict of interest to clients and materially misrepresenting the liquidity of a hedge fund they managed.
The SEC’s Division of Enforcement alleges that Western Pacific Capital Management LLC and Kevin James O’Rourke urged clients to invest in a security without disclosing that Western Pacific would receive a 10 percent commission. Western Pacific and O’Rourke also failed to register as a broker, failed to provide required written disclosures to clients, improperly redeemed one hedge fund investor’s interest ahead of another’s, and made material misstatements and omissions to clients regarding the fund’s liquidity.
“Investment advisers have a fiduciary duty to act in the best interests of their clients and be forthcoming with them,” said Marshall S Sprung, Assistant Director in the SEC Enforcement Division’s Asset Management Unit. “Western Pacific and O’Rourke fraudulently breached that duty by failing to disclose the commissions they would receive for the recommended investments and lying to clients about the liquidity of the fund they managed.”
According to the SEC’s order instituting administrative proceedings, Western Pacific and O’Rourke acted as brokers in the non-public offering of stock by Ameranth Inc. during 2005 and 2006. Ameranth paid Western Pacific a 10 pe rcent “success fee.” Even though Western Pacific and O’Rourke advised their clients to purchase the Ameranth stock, they failed to advise each of their clients that they would financially benefit from their clients’ purchases of stock, and failed to provide any clients with the required written disclosures regarding their role in the offering. Western Pacific received USD482,745 in success fees from Ameranth, of which USD450,495 was due to investments made by its clients.
The SEC’s Enforcement Division also alleges that from 2005 to 2008, Western Pacific and O’Rourke misrepresented the liquidity of The Lighthouse Fund LP, a hedge fund that they formed and managed. Western Pacific and O’Rourke repeatedly stated that only 25 percent of the Lighthouse Fund was invested in illiquid assets, when in fact 90 percent of its assets consisted of illiquid securities.
According to the SEC’s order, Western Pacific used Lighthouse Fund assets to resolve a dispute with a client who no longer wanted his USD800,000 of Ameranth stock. O’Rourke caused the fund to buy some of the stock and permitted the client to use the remainder of the stock to finance his investment in the fund. O’Rourke ultimately redeemed the client’s interest in the fund for cash ahead of another client who had previously requested a full redemption.
As alleged in the SEC’s order, Western Pacific and O’Rourke willfully violated Section 17(a) of the Securities Act of 1933, Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1), 206(2), 206(3), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder.
The SEC’s investigation was conducted by C. Dabney O’Riordan and Marshall S. Sprung, who work in the Los Angeles Regional Office and are members of the Enforcement Division’s Asset Management Unit. Securities compliance examiner Jason P. Haggar conducted the related examination under the supervision of branch chief Dara M. Campbell. The SEC Enforcement Division’s litigation effort will be conducted by Ms. O’Riordan and Donald W. Searles.
