Montford Associates to Pay $650,000 in Securities and Exchange Commission Penalties Over Failure to Disclose Payments from Hedge Fund

The SEC has ordered investment adviser Montford Associates and Ernest Montford Sr. to pay $650K in penalties for failing to disclose that it had received $210K from an allegedly fraudulent hedge fund that it had recommended to clients. The name of the fund is SJK Investment Management. Its owner, Stanley Kowalewski, is accused of using the fund to commit a $16.5 million fraud. Investors that put their money in the fund included the Tallulah Falls School’s endowment program, St. Joseph’s/Candler Hospital System, Georgia Ports Authority, Sea Island Co. Retirement Plan, and Savannah Country Day School Foundation.

Although Montford Associates and Ernest Montford are not accused of involvement in Kowalewski’s securities fraud, the two of them allegedly lied to investors by not telling them about the compensation they were getting for the referrals. Montford and his investment adviser firm were paid “marketing and syndication fees” and “consulting services.”

The SEC contends that failure to disclose the payments for the recommendations violates federal securities laws. The Commission also says that even though Montford was aware that these nonprofits, many of them charitable organizations and schools, were run by part-time volunteers that depended on his investment advice and he knew they wanted consistent, stable investments, he still pushed them to move their investments to SJK so that Kowalewski could manage their money.

In addition to the $650,000 penalty, Montford Associates and Montford must pay disgorgements of $130,000 and $80,000, each with prejudgment interest. They also must set up a Fair Fund so that their clients that were harmed can use the penalties and disgorgement. Both must also cease and desist from committing/causing future violations of the Advisers Act and Advisers Act Rule 204-1(a)(2). Montford also is barred from associating with brokers, investment advisers, municipal securities dealers, dealers, transfer agents, municipal advisors, and nationally recognized statistical rating organizations.

As for the SEC’s hedge fund fraud case against Stanley Kowalewski, the Commission is accusing the hedge fund manager of using millions of dollars in client funds to buy his residence and a beach home and directing $10 million in unfounded fees to his investment management company and himself. He allegedly tried to hide his financial scam by sending fraudulent account statements to investors each month. These updates grossly exaggerated the actual values of assets and returns.

SEC Fines Adviser Over Ties To Hedge Fund Accused Of Fraud, FINalternatives.com, April 30, 2012

Securities and Exchange Commission v. Stanley J. Kowalewski, et al, Case No. 1:11-cv-00056-TCB (N.D. Ga.), SEC.gov, August 29, 2011

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Institutional Investor Fraud Roundup: SEC Seeks Approval of Settlement with Ex-Bear Stearns Portfolio Managers, Credits Ex-AXA Rosenberg Executive for Help in Quantitative Investment Case; IOSCO Gets Ready for Global Hedge Fund Survey, Institutional Investor Securities Fraud, March 29, 2012

Insider Trading: Former FrontPoint Partners Hedge Fund Manager Pleads Guilty to Criminal Charges, Institutional Investor Securities Fraud, August 20, 2011

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Our SEC securities fraud attorneys represent investors that have sustained losses because of financial fraud. It is essential for an investment adviser to stay independent so that investors can trust them. Undisclosed payments for a recommendation compromises an adviser’s ability to make recommendations that are in a client’s best interests. Contact Shepherd Smith Edwards and Kantas, LTD, LLP today.