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SEC Sanctions Fund Administrator Entangled in a Client’s Wrongdoing

An article in online publication FinOps explores a recent SEC action against fund administrator Gemini Fund Services and cautions: “Fund administrators can’t assume the assets of the fund are real without the necessary evidence. And they can’t offer fund advisors much leeway in producing the necessary paperwork to prove a fund’s assets exist.” According to a settlement order with the SEC in which Gemini did not deny or admit the SEC’s findings, Gemini reported inflated NAVs to an exchange for over a year because it included fake assets in its calculation. While Gemini did not know that the assets were fake, it was aware that the fund’s custodian did not have adequate proof of the existence of many of these fake assets and that there were significant discrepancies between Gemini’s records and those of the custodian. According to the SEC, Gemini failed to further investigate the problem with the assets, notify investors or the fund’s board of directors that the custodian did not have proof of the validity of the assets, or reduce the share price to reflect the problem. The principal of the adviser was arrested and charged with criminal securities fraud and in 2016 was sentenced to nine years in prison and was ordered to pay about $15 million, among other penalties. The FinOps article points out that while the SEC has fined a fund administrator for ignoring red flags about a client who violated the securities laws, in the Gemini case “the SEC appears to also be suggesting a code of best practice for fund administrators, when it comes to recordkeeping discrepancies in striking NAVs.” According to people quoted in the article it is unclear why Gemini did not notify the board of the fund or its investors of any concerns. They note that in such scenarios, the CCO of the fund administrator might need to pursue the adviser’s CCO and demand the additional documentation. Compliance experts quoted in the article said that fund administrators should spend more time on due diligence before signing a client and be more vigilant about protecting themselves in relationships with advisers.

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