SEC Appoints Receiver for Florida Firm Charged with Fraud
The US Securities and Exchange Commission (SEC) has
appointed a receiver to preside over Florida-based investment adviser TCA Fund
Management Group Corp. and the funds it manages in order to protect investors
from a fraudulent scheme that included the company allegedly inflating asset
values and falsifying performance results.
According to the SEC’s complaint, TCA allegedly distributed
promotional materials to current and prospective investors that included
improperly recognized revenue in order to fraudulently inflate net asset values
(NAV) and performance for several funds it managed, which resulted in the funds
always reporting positive returns.
“Investors were repeatedly presented a false picture of the
TCA funds, showing them to be much more successful than they actually were,”
Eric Bustillo, director of the SEC’s Miami regional office, said in a
statement. “The SEC sought the appointment of a receiver to help locate and
preserve the funds’ remaining assets for the benefit of investors.”
The court granted the SEC’s request to appoint Jonathan
Perlman as receiver over TCA’s funds the TCA Global Credit Fund LP, the TCA
Global Credit Fund Ltd., and the TCA Global Credit Master Fund LP. A receiver
takes possession of all assets of the receivership entities and provides an
accounting to the court, and they may establish a procedure by which victims
can submit claims and receive a court-approved distribution.
Perlman is a partner at the Genovese Joblove & Battista
law firm, where he heads the firm’s receivership, class action, and securities
litigation practice groups. He has served as a federal court-appointed receiver
in several actions brought by the SEC, the Federal Trade Commission, and the
Florida attorney general’s office, and has helped recover millions of dollars
for victims of fraudulent schemes.
The SEC alleges that the funds’ reported net asset value of
$516 million as of November was inflated by at least $130 million. In addition
to allegedly distributing account statements to investors that falsely
represented monthly returns and investment balances, the SEC also alleges that
the funds paid inflated management fees and performance fees.
The complaint said TCA used two methods to inflate its
funds’ asset values and revenue. The first involved TCA Global Credit Master
Fund’s lending business. At an early stage of the loan process, a prospective
borrower and TCA Global Credit Master Fund would sign a term sheet outlining
the terms of the loan, including the amount of fees the borrower would pay the
master fund when the loan transactions were consummated.
TCA caused the master fund to recognize these prospective
loan fees as revenue at the time of the
execution of the term sheet rather than at the closing of the loan, “knowing or
being severely reckless in not knowing the term sheets were not binding and in
many cases did not lead to a funded loan,” the SEC said in its complaint.
Recognizing the loan fee revenue at the time of term sheet
execution artificially increased the master fund’s profits and the NAV, which
remained inflated until the fee revenue was actually earned for loans that
eventually closed or removed from the books for loans that never closed.
The second method involved agreements for the master fund to
provide investment banking services to a company, which provided for the
company to pay the master fund a fee for the services, which ranged from
hundreds of thousands to millions of dollars. TCA allegedly caused the master
fund to recognize the investment banking fees as revenue at the time the
agreement was signed, even though the companies lacked the means to pay the
fees, and the master fund had provided few if any services to the company at
the time the agreement was signed, the SEC said.
“As a result of these practices, defendants caused the funds
to report to investors that the funds were profitable every month, with an
ever-increasing NAV,” the SEC said in its complaint. “In fact, the booking of
loan fees at the time of term sheet execution artificially inflated the NAV—at
some points in time by as much as $29 million.”
The SEC’s complaint charges TCA and TCA Global Credit Fund
GP Ltd. with violating the antifraud provisions of the federal securities laws
and seeks permanent injunctions, disgorgement of allegedly ill-gotten gains
with prejudgment interest, and financial penalties.
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