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SEC charges Seattle-area investment adviser over undisclosed cash payments

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The Securities and Exchange Commission has brought fraud charges against Bainbridge Island, Washington, hedge fund manager Pegasus Investment Management LLC (PIM) for failing to disclose to fund investors its receipt of cash payments from a third party. 

According to the SEC’s administrative order issued today, PIM combined its securities trades with another firm’s in order for that firm to receive volume discounts.  PIM was paid USD90,000 over a 10-month period for its role and retained the money for itself rather than passing it along to fund investors.
The SEC also charged PIM’s Vice President, Peter Benjamin Bortel, for his role in the violations, and PIM’s President and Chief Compliance Officer, Douglas Wayne Saksa, for failing reasonably to supervise Bortel.  PIM, Bortel, and Saksa agreed to settle the SEC’s charges by paying a combined USD165,000.

“Our investment adviser examiners, who uncovered the payments during an examination of PIM, remain particularly focused on identifying undisclosed conflicts of interest and ensuring that fund managers act in the best interests of their investors,” say Marc Fagel, Director of the SEC’s San Francisco Regional Office.

Robert Leach, Assistant Director in the SEC’s Asset Management Unit in the San Francisco Regional Office, adds: “The law is well-established that a funds’ trade volume belongs to the fund’s clients, not the adviser.  In this case, PIM improperly used that asset for its own benefit and without any disclosure to its investors.”

According to the SEC’s order, a proprietary trading firm sought to obtain a reduced commission rate for its futures trading business in spring 2008. The firm worked out an arrangement with PIM whereby the firms would combine their trading volume so the other firm could obtain this reduced commission rate from the broker. The firm then compensated PIM by paying it 50 cents for each trade that PIM made with the broker. The firm provided Bortel with monthly reconciliation statements showing the total revenue generated by the arrangement. PIM improperly treated the undisclosed payments as its own rather than as an asset of the funds it managed.

The SEC’s order finds that PIM and Bortel violated Section 206(2) of the Investment Advisers Act of 1940 and that PIM and Saksa failed to reasonably supervise Bortel within the meaning of Section 203(e)(6) of the Advisers Act.  The order censures PIM, Bortel, and Saksa, orders PIM and Bortel to cease and desist from future violations of Section 206(2), requires PIM to disgorge USD90,000 in undisclosed payments, and levies USD50,000 and USD25,000 penalties against Bortel and Saksa, respectively.  PIM, Bortel, and Saksa consented to the entry of the order without admitting or denying the findings.

The case was investigated by Sahil W. Desai and Robert S. Leach of the San Francisco Regional Office, who are members of the SEC’s Asset Management Unit.  The examination of PIM was conducted by Vivien Lin, Cindy Tom, and Ada Chee of the San Francisco Regional Office’s investment adviser/investment company examination program.

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