Third-Party Service Provider to Private Equity Funds Pays More Than $350,000 for Gatekeeping Failures
On June 16, 2016, Apex Fund Services (US), Inc., settled charges that it ignored clear indications of fraud while keeping records and preparing financial statements and investment account statements for private funds managed by EquityStar Capital Management, LLC, and ClearPath Wealth Management, LLC, each of which has previously been charged with fraud in SEC enforcement actions. Press Release 2016-120. The settlement highlights the SEC’s focus on gatekeepers and the importance of gatekeepers monitoring red flags, especially when their role includes providing financial information to investors.
With respect to EquityStar, Apex settled charges that it made materially false and misleading statements to investors when it improperly accounted for undisclosed withdrawals from funds (made by EquityStar and manager Steven Zoernack) as receivables even when Apex possessed evidence that neither EquityStar nor Zoernack were willing or able to repay the withdrawals, which totaled over $1 million. After Zoernack stated his intent to repay an initial withdrawal, Zoernack continued to make withdrawals (without making repayments) that Apex repeatedly treated as “receivables,” rather than withdrawals by Zoernack, in the Net Asset Value (“NAV”) reports. Eventually, the “receivables” accounted for nearly 54% of the NAV of one fund and more than 26% of another fund. During this time, Apex learned that Zoernack had previously been convicted for wire fraud. According to the SEC, Apex repeatedly asked Zoernack to make disclosures about the withdrawals that he did not make. The SEC also found Apex ultimately determined that Zoernack would not be able to repay them. Nevertheless, Apex continued to report materially inaccurate NAVs. Release No. 4429.
ClearPath was charged with securities fraud violations relating to a misappropriation scheme last year in the District of Rhode Island. With respect to ClearPath, the SEC found Apex (i) “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 the fund offering documents”; (ii) failed to correct prior financial reports and continued to issue “materially false reports and statements” to ClearPath and an independent auditor; and (iii) used those false reports in communication financial performance to investors. Release No. 4428.
Without admitting or denying the SEC’s findings, Apex agreed to retain an independent consultant to conduct a review of Apex’s policies and procedures and recommend corrective measures. Additionally, Apex will pay a total of $352,449, which includes (i) disgorgement of $89,050, plus $7,786 in interest and a $75,000 penalty for its actions with respect to EquityStar; and (ii) disgorgement of $96,800, plus $8,813 in interest and a $75,000 penalty for its actions with respect to ClearPath.