The SEC brought an enforcement action against Augustine Capital Management, LLC (ACM), an investment adviser, and John T. Porter and Thomas F. Duszynski, its principals, for causing Augustine Fund, L.P. (Fund), a hedge fund, to engage in conflicted transactions without disclosure to, or the consent of, the Fund’s investors. Such consent was needed because ACM had a conflict of interest and therefore could not give meaningful consent on behalf of the Fund. The advisory firm invested in and lent money to two entities in which the ACM owners had an interest. ACM also lent an ACM owner, Duszynski, money to fund his investment in a business venture with other ACM owners. When the venture failed, the SEC stated that Duszynski defaulted on the loan and saddled the Fund and its investors with the resulting losses.
The SEC found that ACM collected nearly $1 million in investor funds by charging the Fund for ACM’s expenses. These expenses, which under the investment documentation provided to investors were to be borne by ACM, included virtually all of ACM’s overhead expenses – including the salaries of ACM employees. Additionally, even though Porter and Duszynski were themselves investors in the Fund, the SEC stated that they exempted themselves and certain of their relatives who were investors in the Fund from paying their pro rata shares of the salaries of ACM employees.
The offering documentation ACM gave to investors provided that classes would be formed and that an investor’s holdings in the Fund would be based upon when the investor made an investment in the Fund. In practice, however, ACM unilaterally determined which investments were allocated to which investors, and how much cash was allocated to each investor’s account. ACM thereafter periodically reallocated various investors’ holdings. The SEC thus found that ACM improperly kept investors in the dark about what investments were allocated to them, and why.
The SEC also stated that ACM provided investors with account statements that did not accurately reflect the market value of the underlying investments. ACM privately concluded that one of the Fund’s investments had been rendered worthless. But the account statements for the quarter did not capture adverse developments that occurred during that timeframe. Instead, in the account statements ACM valued the investment at what the Fund had originally paid for the investment before their determination the investment was worthlesss.
The SEC found that ACM, Porter and Duszynski willfully violated, Sections 206(1), 206(2) and 206(4) of the Advisers Act and Rule 206(4)-8(a).
Click here for the enforcement action.