U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 23549 / May 31, 2016
Securities and Exchange Commission v. Momentum Investment Partners LLC (D/B/A Avatar Investment Management) and Ronald J. Fernandes, Civil Action No. 16-cv-00832 -VLB (D. Conn. filed May 31, 2016)
SEC Charges Connecticut-Based Investment Adviser for Failure to Disclose Fees to Clients
The Securities and Exchange Commission today announced fraud charges against Connecticut-based investment adviser Momentum Investment Partners LLC (doing business as Avatar Investment Management), and one of its principals, Ronald J. Fernandes, for failing to disclose to some of Avatar's advisory clients certain fees they were being charged.
According to the SEC's complaint, filed in federal court in Connecticut:
- Avatar and Fernandes created new mutual funds in 2013 and moved some of their advisory clients' assets into the newly-created mutual funds, but did not disclose to the clients that this would increase the fees the clients paid to Avatar without changing the clients' investment strategy.
- Prior to March 2013, Avatar was advising and managing approximately 20 individual client accounts from eight different families of investors using Avatar's own proprietary investment strategy.
- Avatar and Fernandes decided to create the Avatar mutual funds and use the same proprietary investment strategy to manage assets within the mutual funds. Avatar launched the Avatar mutual funds in March 2013 and transferred individual client assets into the funds in May 2013.
- After the transfer of client assets into the mutual funds, Avatar advisory clients were exposed to the same investment strategy in the mutual funds that existed for them before as individual advisory clients, and thus did not receive any different or additional advisory services. But moving their assets into Avatar's mutual funds caused these clients to pay higher fees and enabled Avatar to receive additional compensation for implementing the same investment strategy.
- Before moving advisory client assets into the mutual funds, neither Avatar nor Fernandes provided any notice to the Avatar clients that their funds were being moved into the Avatar mutual funds, or they would pay additional management fees to Avatar for no additional services once invested in the mutual funds.
- The Avatar individual advisory client assets proved to be the seed capital for the Avatar mutual funds, but Avatar was not successful in raising additional assets for the Avatar mutual funds and the funds eventually folded. Avatar is now defunct.
The SEC's complaint alleges that Avatar and Fernandes violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940, Avatar violated Sections 206(4) and 207 of the Advisers Act and Rule 206(4)-7 thereunder, and Fernandes aided and abetted Avatar's violations of Sections 206(1), 206(2), 206(4) and 207 of the Advisers Act and Rule 206(4)-7 thereunder, and seeks permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest, and a civil penalty.
The SEC's investigation was conducted by Lawrence Pisto, Ruth Anne Heselbarth and David London and supervised by Robert Baker. The case was a referral from an exam conducted by Marie Hagelstein, Ken Leung and Huu Son and supervised by Liza Fine-Magnan. The SEC's litigation will be led by David London.
