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SEC Charges Hedge Fund Manager with Misleading Investors

Sept. 14, 2018

File No. 3-18768

The Securities and Exchange Commission today charged Cecil Gregory Earls with making false and misleading statements to investors about the management of Kandax Capital Management, LLC, an unregistered hedge fund adviser, and its affiliated hedge fund, The Fincastle Fund, L.P.  The SEC also charged Thomas R. Caggiano with aiding and abetting and causing certain of Earls’ violations.  Earls allegedly enlisted his friend Caggiano to hold the title of Managing Member of Kandax because Earls, due to his criminal history, had been unable to open a brokerage account for Fincastle.  Earls has prior criminal and civil judgments entered against him for violating the federal securities laws.  In 2005, he was sentenced to approximately ten years in prison and ordered to pay criminal restitution of $21.9 million.  In 2011, Earls consented to a final judgment that, among other things, barred him from acting as an officer or director of a public company for 20 years.

As found in the SEC’s order, shortly after his release from prison, Earls formed an unregistered advisory firm and hedge fund and began soliciting investors.  From 2015 through 2018, in connection with this hedge fund business, Earls made false and misleading statements to investors on the Kandax website and in offering materials.  For instance, Earls claimed that Kandax had a management team consisting of Caggiano and two other individuals, and that Earls was a portfolio manager who did not exercise any “managerial control” over Kandax.  These statements were materially false.  Earls alone managed and controlled Kandax and Fincastle Fund.  Caggiano, the purported “Managing Member” of Kandax, performed only limited administrative functions at Kandax, and two other individuals held out as “Managing Directors” were passive investors who had no role in managing Kandax. 

According to the SEC’s order instituting administrative proceedings, Caggiano opened the Fincastle Fund brokerage account at Earls’ request.  In doing so, Caggiano falsely represented to the brokerage firm that none of the officers or principals of Kandax or Fincastle Fund had a criminal conviction, and that Caggiano would be the only authorized user on the account.  Once opened, Caggiano provided Earls with the user name and password of the account, and Earls conducted or directed all trading and other transactions in the account.

The SEC’s order finds that Earls willfully violated the antifraud provisions of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder, and that Caggiano willfully aided and abetted and caused Earls’ violations of the antifraud provisions of the Exchange and Advisers Acts and the rules promulgated thereunder.  Earls and Caggiano agreed to settle the SEC’s charges without admitting or denying the findings.  Among other relief, the SEC’s order imposes industry bars against Earls and Caggiano, and a $25,000 civil penalty against Caggiano.  Based upon Earls’ financial condition, the SEC did not impose a penalty against Earls.

The SEC’s investigation was conducted by Darren E. Long with assistance from Robert Dodge.  The case was supervised by Brian O. Quinn.

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