The Securities and Exchange Commission ("SEC") reached
a $350,000 settlement with a firm that served as an
administrator to private investment funds in relation to
allegations that it failed to respond to red flags and correct
faulty accounting by two of its clients.
Following an investigation by the SEC's Asset Management Unit,
the agency found Apex Fund Services either missed or ignored clear
indications of fraud while being engaged to keep records and
prepare financial statements and investor account statements for
funds managed by ClearPath Wealth Management and EquityStar Capital
Management, both ofwhich have since been charged with fraud by the
SEC.
Andrew Ceresney, director of the SEC's Division of Enforcement,
said Apex failed to fulfill its gatekeeper responsibilities and
allowed the schemes to continue at each firm.
"Fund administrators are responsible for ensuring that fund
records provide accurate information about the value and existence
of fund assets," Ceresney said.
The settlement reflects the SEC's ongoing efforts to confirm
adequate compliance protocols are not only in place but also being
adhered to on an ongoing basis. Private funds and their
administrators should ensure that processes to both detect and
— equally important — respond to potential fraudulent
activity are in place and rigorously followed.
ClearPath and its owner, Patrick Churchville, were charged with fraud in May 2015. In this case,
the SECalleged that Apex failed to respond appropriately after
discovering undisclosed brokerage and bank accounts, undisclosed
margin and loan agreements, and inter-series and inter-fund
transfers made in violation of fund offering documents. It also
failed to correct previously issued accounting reports and capital
statements, and instead continued to provide "materially
false" reports and statements to both ClearPath and the
funds' independent auditor. These false reports were then used
to communicate inaccurate financial positions and performance to
the funds' investors.
EquityStar and its owner, Steven Zoernack, were charged in March 2016. The SEC alleged Apex
accounted for more than $1 million in undisclosed withdrawals by
Zoernack from EquityStar funds as receivables owed to the funds,
despite the absence of evidence that Zoernack was able or willing
to repay the withdrawals. Although Apex confronted Zoernack and
concluded he was unlikely to repay the funds, the firm failed to
adequately account for the improper withdrawals, which accounted
for more than half of the net asset value of one fund and more than
one quarter of the other. Subsequently, Apex issued account
statements to investors that it knew or should have known
materially overstated the investors' true holdings in the
funds.
Apex neither admitted nor denied the charges as it agreed to retain
an independent consultant and pay $352,449, including disgorgement
of $96,800, $8,813 in interest and a $75,000 penalty in relation to
the ClearPath fraud. For its role in the EquityStar fraud, it
agreed to pay disgorgement of $89,050, interest of $7,786 and a
penalty of $75,000.
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