SEC Charges Former Private Fund Managers for Disclosure and Management Failures, and Investment Adviser with Failing to Disclose Conflicts of Interest

March 24, 2021 - The Securities and Exchange Commission today announced settled charges against Troy E. Marchand and Tyler C. Sadek, former principals of Foundry Capital Group, a state-registered investment adviser that managed the private Foundry Mezzanine Opportunity Fund (the "Fund"), for making misrepresentations and omissions to Fund investors about the status of Fund holdings and projected revenue. The settlement with Marchand, who managed the day-to-day operations of the Fund, also included charges related to misrepresentations and omissions to investors about Fund due diligence and the process used to value Fund holdings. The SEC also announced settled charges against Scott T. Wolfrum, an investment adviser and brokerage representative, for failing to disclose personal conflicts of interest when selling interests in the Fund to his advisory clients.

According to the SEC's orders, the Fund was primarily established to generate consistent cash flow from interest on loans made to private companies. The orders against Marchand and Sadek find that between February 2017 and November 2017, Marchand sent newsletters to Fund investors, reviewed by Sadek, which contained misrepresentations and omissions about the status of certain companies that received loans from the Fund. The orders find that the newsletters showed annual interest revenue generated from those loans without disclosing that several companies that received loans from the Fund were struggling financially and delinquent on their interest payments. The order against Marchand further finds that Marchand misrepresented to investors that Foundry Capital would obtain independent valuations of Fund holdings, when in fact Marchand had considered doing so but chose not to, and instead determined simply to value the holdings at cost. The order against Marchand also finds that Marchand misled investors about the due diligence process for Fund investments.

Separately, the SEC's order against Wolfrum finds that between December 2015 and June 2018, Wolfrum raised more than $20 million for the Fund from investors, almost all of whom were his advisory clients. The order finds that Wolfrum did not disclose to his advisory clients the full extent of his conflicts of interest associated with selling Fund interests. Specifically, the order finds that Wolfrum failed to disclose that he received finder's fees from certain Fund holdings, and that he and his family had financial interests in certain of the Fund's holdings.

Marchand, Sadek, and Wolfum agreed to the SEC's orders without admitting or denying the findings. The SEC's order against Marchand finds that he violated Sections 17(a)(1) and 17(a)(3) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder, and includes a cease-and-desist order and associational bar with the right to apply for reentry in five years, but imposes no penalty in light of Marchand's financial condition. The SEC's order against Sadek finds that he violated Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder, and includes a cease-and-desist order, a censure, and a $30,000 civil penalty. The SEC's order against Wolfrum finds that he violated Section 206(2) of the Advisers Act, and includes a cease-and-desist order, a censure, $161,479 disgorgement and prejudgment interest, and a $75,000 civil penalty. The order also requires Wolfrum to provide notice of the SEC's order to his advisory clients.

The SEC's investigation was conducted by Jonathan I. Katz of the Asset Management Unit along with Donald Ryba of the Chicago Regional Office, and was supervised by Jeffrey A. Shank. SEC examination staff aided the investigation, including John Ekdale, Jason Chronopoulos, Kent McAllister, Gena Kusiak, Stephanie Werner, Joseph Atatsi, Craig Carlson, Jonathan Theobald, and Thomas Meier.