Investing

SEC Charges Fund Managers With Gatekeeper Failures

Chris Lange

Published: June 16, 2016 12:10 pm

Last Updated: January 13, 2020 6:43 am

The U.S. Securities and Exchange Commission (SEC) recently announced that a firm providing administrative services to private funds has agreed to pay over $350,000 to settle charges regarding a failure to heed red flags and correct faulty accounting by two clients.

The agency found that Apex Fund Services missed or ignored clear indications of fraud while contracted to keep records and prepare financial statements and investor account statements for funds managed by ClearPath Wealth Management and EquityStar Capital Management.

Both of these clients have since been charged with fraud in SEC enforcement actions.

Andrew Ceresney, director of the SEC’s Division of Enforcement, commented:

Fund administrators are responsible for ensuring that fund records provide accurate information about the value and existence of fund assets. Apex failed to live up to its gatekeeper responsibility and essentially enabled the schemes to persist at each of these advisory firms until the SEC stepped in.

According to the report, ClearPath and its owner Patrick Churchville were charged with fraud last year:

• Apex failed to act appropriately after detecting undisclosed brokerage and bank accounts, undisclosed margin and loan agreements, and inter-series and inter-fund transfers made in violation of fund offering documents.
• Apex failed to correct previously issued accounting reports and capital statements and continued to provide materially false reports and statements to ClearPath and the funds’ independent auditor.
• ClearPath then used Apex’s false reports and statements to communicate financial positions and performance to the ClearPath funds’ investors.

Also the SEC order found that EquityStar and its owner Steven Zoernack were charged in March:

• Apex accounted for more than $1 million in undisclosed withdrawals by Zoernack from the EquityStar funds as receivables owed to the funds, despite no evidence that Zoernack was able or willing to repay the withdrawals.
• Apex confronted Zoernack about the withdrawals and concluded he was unlikely to repay the funds. Nevertheless, Apex did not properly account for Zoernack’s withdrawals – which grew to more than half of the net asset value of one fund, and more than one quarter of the other.
• Apex sent monthly account statements to investors that it knew or should have known materially overstated the investors’ true holdings in the funds.

Without admitting or denying the findings, Apex agreed to retain an independent consultant and pay a total of $352,449, including disgorgement of $96,800 plus interest of $8,813 and a penalty of $75,000 for its role in the ClearPath fraud and disgorgement of $89,050 plus interest of $7,786 and a penalty of $75,000 for its role in the EquityStar fraud.