For several years, the Securities and Exchange Commission has been cracking down on fraudulent hedge fund fundraising, most of which is allegedly linked to securities fraud. These include illegal “stock crowdfunding,” where companies soliciting investors to invest in “private” stocks by giving them shares of the company’s stock for free, and “initial public offerings” which are usually held through a stockbroker.
In a recent enforcement action, the SEC accused several hedge funds and brokers of fraudulently soliciting investors and then selling stock to the public in an SEC-sponsored program.
“When it comes to investing in securities, there are certain issues that must first be addressed by brokers and firms: Do they have a proper license? Am I required to purchase the securities through a traditional brokerage account? Is a securities transaction a legal and safe investment?” said Timothy Treadwell, Chief Counsel in the Securities Division. “These are just a few of the questions that go to the heart of the integrity of an investment company or fund.”
What are the charges against Mr. Williams and his colleague, the alleged fraudster?
A person is deemed to be a “personally liable participant” when he or she “possesses the securities in violation of the securities laws, including fraud in selling, marketing or issuing the securities, or knowingly fails to maintain an adequate and complete system to meet the applicable securities laws.”
When asked if Mr. Williams was guilty, the SEC confirmed that a person would be deemed a “personally liable participant” for “possession, ownership, performance, exercise, or lack of performance” of securities when “the person is in direct contact with, or directly involves in, the management or investment, or is directly engaged in the investment, of the funds or securities in violation of a securities law.
Why the SEC has taken action against these firms?
In the course of its work, the SEC has come into contact with several broker-dealers that have knowingly sold or otherwise provided a “facilitating investment” to investors using false or fraudulent representations. The SEC is now seeking to prevent these firms from acting in a similar manner.
How did SEC take action against the hedge fund involved in the SEC-licensed stock crowdfunding?
On February 27, 2016, the Securities and Exchange Commission filed a Rule 14-A charge alleging that the alleged fraud involved more than 15,000 private investors in multiple hedge funds. The SEC alleges that over the course of three years, these hedge
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