A principal of an investment adviser partially settled a previously filed administrative proceeding which centers on claims that he and another Respondent improperly advised their clients to invest in off-shore funds without fully disclosing their affiliation with those funds or the fees they were paid. In the Matter of Larry C. Grossman, Adm. Proc. File No. 3-15617 (Nov. 20, 2013).
Respondents Larry Grossman and Gregory Adams were affiliated with registered investment adviser Sovereign International Asset Management, Inc. Mr. Grossman was the sole owner of Sovereign from the time of its formation in 2001 until October 2008 when he sold the firm and its affiliates to Mr. Adams. After the sale Mr. Grossman continued to be affiliated with the adviser until the firm was administratively dissolved in 2012.
Sovereign had about $85 million in assets under management at its peak in 2008. Many of its investors were retirees. Shortly after forming Sovereign, Mr. Grossman met Nikolai Simon Battoo, the principal of BC Capital Group, S.A. and its affiliated companies which operated off shore hedge funds. Mr. Battoo was named as a defendant in a Commission fraud action brought in 2012, SEC v. Battoo, Case No. 12CV125 (N.D. Ill.).
In 2003 Mr. Grossman executed three referral agreements and one consulting contract on behalf of a Sovereign affiliate with funds and entities controlled or owned by Mr. Battoo. Under three agreements referral fees were paid to Sovereign. The fourth called for the payment of fees directly to Mr. Grossman for consulting services.
From August 2003 through October 2008 Mr. Grossman recommended to Sovereign clients that they invest almost exclusively in off-shore funds in the Battoo group. In making these recommendations the full risks of the investment were not adequately disclosed. Some investors were told that the funds were very safe, contrary to their offering documents. None were told that all of the funds were cross collateralized.
Messrs. Grossman and Adams also did not properly or fully disclosed to Sovereign’s investors the fees paid under the four agreements with the Battoo group. In some materials there was no disclosure of the fees. In others there were statements indicating that fees may be paid despite the fact that they were actually being paid. Investors were thus largely unaware of the conflict on which the investment recommendations were based.
In late 2008 one of the Battoo funds notified a shareholder class that it was suspending redemptions. Before that action was taken, Mr. Grossman learned that the fund had not honored redemption requests for several months. Messrs. Gossman and Adams also learned that Mr. Battoo had stopped providing investors with audited financial statements as required in the offering materials. In addition, the two men understood that the asset verification reports which were available on request were being prepared by parties related to Mr. Battoo, not independent third parties. Mr. Adams never questioned the reason for the suspension, accepting the representation of Mr. Grossman that it was caused by an account transfer. Mr. Grossman continued to advise Sovereign’s clients to invest in, or retain their investments in, the Battoo funds.
By 2010 Mr. Batto refused to permit withdrawals from another fund. The next year he claimed that was caused by losses incurred in the MF Global bankruptcy. The Order alleges violations of Securities Act Section 17(a), Exchange Act Section 15(a) and Advisers Act Sections 206(1), 206(2), 206(3), 206(4) and 207. The proceeding will be set for hearing.
Mr. Adams partially resolved the proceeding, consenting to the entry of a cease and desist order based on the Sections cited in the Order. He also agreed to be barred from the securities business. In addition, Mr. Adams agreed to pay disgorgement and a third tier civil penalty in amounts to be determined later.