SEC Prevails on Summary Judgment

SEC Prevails on Summary Judgment

The Commission prevailed on a motion for summary judgment against the founder and chief investment officer of a registered investment company, Leila Jenkins. The complaint centered on allegations that about $1.2 billion of the $1.3 billion the fund claimed to have under management was fictitious. The claims were apparently made to induce investors to invest in Locke Capital Management. SEC v. Locke Capital Management, Inc., Civil Action No. 09-CV-100 (D.R.I.).

In granting the Commission's motion for summary judgment, the Court entered a final judgment of permanent injunction prohibiting Ms. Jenkins from violating Securities Act Section 17(a), Exchange Act Section 10(b), and Advisers Act Sections 206(1), 206(2) and 207. The judgment also orders her to pay disgorgement of $1,781, 520 plus prejudgment interest and a civil penalty in the amount of the disgorgement. Locke previously defaulted. Accordingly, the Court entered a similar injunction against the company which includes Advisers Act Section 204 but not Section 207. The company is jointly and severally liable for the payments.

The underlying case appears to stem from a Commission inspection of Locke in 2008. Prior to that time the company represented in Form ADV that it had assets under management ranging from $82 million in 2003 to over $1.3 billion in 2008. Firm marketing materials contained different numbers for earlier years. For 2003 those materials stated that the firm had $400 million under management while at one point in 2008 it had over $1.3. The bulk of the funds were supposedly from a Swiss client who was either a money manager or private bank frequently referred to as SPB accounts.

When the staff began its examination Locke furnished documents indicating that about $1.2 billion of the assets under management were funds held by the Swiss client. Locke had been retained to give advise. Documents were furnished to the staff for the Swiss client's accounts at JP Morgan Chase. The documents were false. The bank had no record of the account. Records available to Swiss authorities do not contain any trace of the so-called Swiss client.

After the Commission commenced its investigation the firm claimed the Swiss client terminated the relationship. This was supposedly confirmed by a January 6, 2009 letter from the Swiss client furnished to the staff. Despite that letter Locke continued to represent to clients that it had $1.2 billion in assets under management. Those statements echoed earlier representations made to clients and prospective clients.

In fact the Swiss client was a fabrication according to the complaint. The firm had less than $165 million under management. Unlike many investment fund fraud cases, here there is no allegation that investor funds were misappropriated.

For more cutting edge commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.

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