Fund Administrator Charged For Missing Red Flags

The Securities and Exchange Commission (SEC) has unveiled a resolution involving Theorem Fund Services LLC (TFS), a fund administrator situated in Boca Raton, Florida. TFS has settled charges for its failure to act upon red flags related to a fraud perpetuated against a private fund and its investors.

The SEC’s order reveals that TFS offered administrative services to a fund overseen by EIA All Weather Alpha Fund Partners and Andrew M. Middlebrooks. Both of these individuals were charged by the SEC in May 2022 with fraud, accused of participating in a fraudulent scheme that spanned five years. The scheme allegedly involved misappropriation and improper usage of investors’ funds. As outlined in the order, the fund incurred substantial losses due to trading conducted by EIA and Middlebrooks. However, TFS, following the instructions of EIA and Middlebrooks, calculated the Net Asset Value without acknowledging these losses. Consequently, TFS sent account statements to investors that significantly overstated the value of their investments.

Andrew Dean, Co-Chief of the SEC Enforcement Division’s Asset Management Unit, commented, “In the realm of private funds, fund administrators play a pivotal role as gatekeepers. In this instance, TFS neglected its role as a gatekeeper and distributed inaccurate account statements to investors despite the presence of clear indicators.”

The SEC’s order determines that TFS contributed to some of the violations committed by EIA and Middlebrooks under the Securities Act of 1933 and the Investment Advisers Act of 1940, including Rule 206(4)-8(a)(1) thereunder. Without admitting or denying the SEC’s findings, TFS has agreed to abide by a cease-and-desist order and pay a civil penalty amounting to $100,000. Furthermore, TFS has consented to disgorge $18,000 and cover prejudgment interest totaling $4,271.

This resolution highlights the importance of vigilance by fund administrators in the private fund sector and emphasizes the consequences of failing to fulfill their gatekeeping responsibilities.