A recent action by the Securities and Exchange Commission caught my attention. The SEC charged a hedge fund manager with taking excess management fees. For a more exciting headline, the SEC press release says the excess fees were to “make lavish purchases.”
Sean C. Cooper improperly withdrew more than $320,000 from a hedge fund he managed for San Francisco-based investment advisory firm West End Capital Management LLC. West End disclosed to clients that a 1.5% management fee is applicable and taken from their capital account balance. But Cooper took more than the permitted 1.5%.
It’s no surprise that Cooper was charged. He was stealing money from his investors. (I don’t care what he spent it on.) Cooper owned West End with two other partners. The other two had little involvement in the day-to-day operations of the hedge fund.
West End was also charged because the firm failed to have controls in place to prevent Cooper from making improper withdrawals. The fund documents provided quarterly management fee payments. Cooper made eleven fee withdrawals in 2010. Cooper continued this behavior through 2011 and only stopped in April 2012 because of a SEC examination.
In June 2012, the Fund’s independent auditors determined that West End’s lack of monitoring and approval of Cooper’s withdrawals in excess of the amounts permitted by the Fund’s governing documents was a significant deficiency in internal controls. I think the auditors were a bit late in coming to that determination.
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