SEC Alleges Investment Adviser Delayed Losses to Earn Incentive Fees

SEC charges Hope Advisers Inc. over timing trades to erroneously earn fees.

The Securities and Exchange Commission (SEC) has just announced charges that Hope Advisers Inc, a Tennessee-based investment advisory firm in Nashville, orchestrated elaborate trade allocations in order to charge clients millions of dollars in incentive fees that would have otherwise been waived due to net monthly losses of more than $50 million over a several year period.

Owned by Karen Bruton, Hope Advisers was probably not hoping to receive the charges, which may also require its charity, the Just Hope Foundation, to give back money to clients after it received fees that it wasn’t entitled to.

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“We allege that Hope Advisers and Bruton disregarded investors by engaging in a pattern of deceptive trades so they could continue earning large incentive fees,” said Walter Jospin, Director of the SEC’s Atlanta Regional Office, commenting in an official SEC statement.

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Incentive fee scheme

Fund managers or RIAs that charge incentive fees are typically only owed such fees if any new net gains at the end of a month exceed the prior high watermark of the account equity – where the last fee was charged in the prior period – to help align the adviser’s interest in the incentive fee with the client’s interest.

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This structure helps to ensure that compensation is only paid when clients’ accounts are continually growing, however, examiners from the SEC Atlanta office detected alleged misconduct during an examination of Hope Advisers that points to a scheme that was employed with timed trades used as a loophole to circumvent how the fees were charged, as implied by the official SEC statement.

These trades we described as fraudulent by the SEC, as it said that Hope Advisers would have received nearly no incentive fees since October 2014 if it weren’t for the elaborate timing and sequence that the trades had been booked in – in order to charge clients a fee – despite looming trading losses.

Consent to interim order

The SEC complaint was filed in a federal court in Atlanta, and the agency said that both Hope Advisers and Bruton have consented to an interim order which restricts them from accessing $7 million of their own investment in the funds, prohibits them from taking on any new investments in the fund and requires them to follow the fund’s fee structure properly with regard to charging incentive fees.

The firm’s two private funds included Hope Investments LLC and HDB Investments LLC, which have more than $175 million in net asset value (NAV). The SEC alleges that the firm purposefully booked large gains at the end of certain months in order to charge incentive fees ranging from 10-20% of profits – while basically ‘guaranteeing’ a large loss for the start of the new month.

The firm’s charity foundation was not charged with any wrongdoing but was named as a relief defendant in the complaint as it may be required to give back money that it received related to the charged incentives fees in question.

The SEC recently announced action against a trader that made false regulatory filings in order to allegedly manipulate the price of a stock that he had built a position in using options contracts.

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