SEC Sanctions Adviser Based on Conflicts, Sham Transaction
The retail focus of the Enforcement Division is translating into proceedings and cases involving investment advisers. Last year the second largest group of actions initiated by the Commission involved investment advisers. That trend seems to be continuing this year. Two recent examples are the actions filed against an adviser and its COO. Not only are they built on breaches of fiduciary duty fueled by conflicts, at the center of each proceeding is a sham transaction orchestrated by the adviser and its COO at the expense of its clients. In the Matter of Talimen, LLC, Adm. Proc. File No. 3-19108 (March 15 2019).
Talimen is a Commission registered investment adviser. Its CEO, and a member of the investment committee, is Grant Gardner Rogers, named as a Respondent in a related proceeding cited below.
Over a three year period, beginning in 2012, Talimen served as the collateral manager and investment adviser to several collateralized debt obligations or CDOs. The assets held by the CDOs included participations in a $57.2 million first mortgage on a Chicago hotel. The participations entitled the CDOs to a stream of income from the mortgagees. By early 2014, however, the mortgage loan was in default.
In June 2014 Talimco created a Fund and became its adviser. The Fund focused on real estate investments. Subsequently, Talimco explored acquiring the participations held by the CDOs. By the end of the year the Fund had acquired all but one of those interests, valued at about $10 million.
In April 2015 the Fund sought to acquire the final participation related to the Chicago hotel. The Fund was acting on the advice of Talimco. At the same time Talimco was advising the collateral manager. Under the operating documents for the CDO the interest was to be sold at an auction to maximize the return. Those documents also required Talimco to obtain at least three bids.
In compliance with the CDO operating documents, Talimco advised the Fund to bid 50% of the face value. The adviser also arranged for four market makers to bid in the auction. The market makers were reluctant to become involved in the auction. Nevertheless, each bid at the direction of the adviser, understanding that they would not win.
The Fund prevailed in the auction, not the market makers. Ultimately, in December 2015 Talimco caused the Fund to sell the mortgage loan participations for $43.5 million to the highest bidder at an auction. Each participation had been acquired at 50% of face value. The Fund realized a profit of about $14.9 million. Mr. Rogers personally realized profits of about $14,000 on the sale of the approximately $10 million participation. Talimco also received about $74,000 in management and performance fees attributable to the purchase of the approximately $10 million mortgage loan participation from the CDO by the Fund. The CDO that sold the last loan participation was unable to repay all of its debts, including about $410,000 in principal owed to CDO noteholders.
The Order alleges violations of Advisers Act Section 206(2). In resolving the matter, the adviser agreed to cooperate fully with the Commission. The adviser consented to the entry of a cease and desist order based on the section cited in the Order and to a censure. Talimco will also pay disgorgement of $74,000, prejudgment interest of $8,758.80 and a penalty of $325,000. See also In the Matter of Grant Gardner Rogers, Adm. Proc. File No. 3-19107 (March 15, 2019)(COO of adviser settled action based on the same facts, consenting to the entry of a cease and desist order based on Advisers Act Section 206(2), a 12 month suspension from the securities business and the payment of a $65,000 penalty).