SEC Brings Enforcement Action Involving Inadequate PPM Disclosure

The SEC recently announced a settled enforcement action against a hedge fund manager (who was also a registered adviser) alleging that the manager fraudulently took securities for itself that its hedge funds had purchased. Although the case may be viewed simply as another misappropriation matter, a closer look at the alleged facts and legal analysis relied on by the SEC suggest important lessons and potentially interesting developments. See In the Matter of M.A.G. Capital, LLC, Advisers Act Release No. 2849 (Mar. 2, 2009), available at http://www.sec.gov/litigation/admin/2009/ia-2849.pdf.

According to the SEC settlement order, the manager's funds purchased warrants and other securities in PIPE transactions. On forty-four separate PIPEs transactions between May 2003 and September 2006, the manager took a portion of the warrants in each transaction, but did not compensate the funds for the warrants that it took. The SEC settlement order further stated that during