Aug. 7, 2023 — The SEC announced settled charges against Theorem Fund Services LLC (TFS), a prominent fund administrator based in Boca Raton, Florida. The charges were brought against TFS for their failure to respond adequately to red flags related to a fraud perpetrated against a private fund and its investors.
TFS’s Engagement with EIA All Weather Alpha Fund Partners
According to the SEC’s order, TFS provided administration services to a fund managed by EIA All Weather Alpha Fund Partners and Andrew M. Middlebrooks, both of whom the SEC charged with fraud in May 2022. The alleged scheme involved the misappropriation and misuse of investors’ funds over a five-year period. During TFS’s engagement with the fund, significant losses were incurred due to trading by EIA and Middlebrooks. However, despite these losses, TFS, under the direction of EIA and Middlebrooks, calculated the Net Asset Value without recognizing the losses. As a result, TFS sent investors account statements that grossly overstated the value of their investments.
The Role of Fund Administrators and TFS’s Negligence
Fund administrators play a crucial role as gatekeepers in the private fund space. They are responsible for ensuring compliance with regulations and safeguarding investors’ interests. However, in this case, TFS failed to live up to its gatekeeper responsibilities and distributed inaccurate account statements to investors despite clear red flags.
Andrew Dean, Co-Chief of the SEC Enforcement Division’s Asset Management Unit, emphasized the significance of fund administrators’ roles and criticized TFS’s negligence in this matter. He stated, “Fund administrators are important gatekeepers in the private fund space. Here, TFS failed to live up to its gatekeeper responsibilities and distributed inaccurate account statements to investors despite clear red flags.”
TFS Found Culpable for Violations and Settlement
The SEC’s order found that TFS was a cause of certain violations of the Securities Act of 1933 and the Investment Advisers Act of 1940, along with Rule 206(4)-8(a)(1) thereunder, committed by EIA and Middlebrooks. As part of the settlement, TFS agreed, without admitting or denying the SEC’s findings, to a cease-and-desist order and a civil penalty of $100,000. Moreover, TFS will pay disgorgement of $18,000 and prejudgment interest of $4,271.
In conclusion, Theorem Fund Services’ negligence in ignoring red flags and distributing inaccurate account statements has led to significant consequences for the firm. The SEC’s actions underscore the importance of fund administrators’ vigilance and responsibility in protecting investors’ interests.
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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.
He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.