The Securities and Exchange Commission is charging Hope Advisors Inc. and owner Karen Bruton with scheming to get two hedge funds that they managed to pay them extra fees. The private hedge funds are HDB Investments LLC and Hope Investment LLC.
The purported misconduct was discovered by the regulator’s Atlanta office, which was examining the Nashville, Tennesse-based firm and Bruton. The regulator claims that Hope Advisors and Bruton sought to get around the funds’ fee structure, which lets the firm receive fees from the funds only if their profits for the month exceeds previous losses. The firm and Bruton are accused of orchestrating a number of trades that would let the funds make a bigger gain closer to the end of the month and guarantee a big loss early on at the start of the next month.
The SEC said that if it weren’t for the fraudulent trades, Hope Advisors would have earned almost no incentive fees for close to two years. Instead, claims the Commission, the firm managed to avoid realization of over $50M in losses while making millions of dollars in fees that they should have never been paid.
The two hedge funds hold over $175M in net asset value. The firm’s only compensation for managing the two funds is incentive fees.
The Just Hope Foundation, which is Bruton’s charity, is a relief defendant in the case. Bruton and Hope Advisors have agreed to an interim order preventing them from accessing $7M of their own investments in the two hedge funds. They are not allowed to collect additional fees unless they meet the high water mark in the structure of the funds and they cannot take additional investments in the hedge funds.
Both Bruton and her investment advisory firm are not denying or admitting to the SEC allegations. They are, however, preliminarily enjoined from violating federal securities laws’ antifraud statutes.
SEC Alleges Nashville Firm Schemed to Collect Extra Fees from Hedge Funds, SEC, June 1, 2016