SEC Charges Advisory Firm With Due Diligence and Monitoring Failures
Nov. 6, 2018
Former CEO Also Charged With Causing Compliance Failures
File No. 3-18884
November 6, 2018 – The Securities and Exchange Commission today announced that Pennant Management, Inc., formerly a registered investment adviser based in Milwaukee, has agreed to settle charges that it negligently failed to perform adequate due diligence and monitoring of certain investments contrary to Pennant’s representations to clients, which ultimately contributed to substantial client losses. Separately, Pennant’s former CEO, Mark A. Elste, also agreed to settle charges that he contributed to Pennant’s compliance failures.
An SEC order found that, from May 2013 to September 2014, Pennant advised clients to purchase interests in facilities and other investments containing repurchase, or “repo,” agreements for portions of loans guaranteed by various government entities. First Farmers Financial sought to use Pennant to finance what it claimed would be loans guaranteed by the U.S. Department of Agriculture. Pennant’s initial due diligence of First Farmers identified concerning information about First Farmers’ CEO, which was never escalated. The order found that Pennant continued to offer the First Farmers repos to clients despite growing concerns about the legitimacy of the investments, including questions about whether First Farmers lied about the existence of its auditor. By the end of September 2014, Pennant determined that First Farmers had forged paperwork and that all of the First Farmers repo agreements were fraudulent. According to the SEC’s order, Pennant’s compliance program also lacked sufficient resources, and Pennant failed to reasonably design and implement certain compliance policies and procedures, including policies and procedures regarding initial and ongoing due diligence and monitoring of repurchase agreement counterparties.
A separate SEC order found that Elste was aware of but failed to address resource deficiencies in Pennant’s compliance program, which contributed substantially to Pennant’s compliance violations.
The SEC’s order as to Pennant found that the adviser willfully violated antifraud, compliance, and books-and-records provisions of the Investment Advisers Act of 1940, Sections 204(a), 206(2), 206(4), and 207 of the Advisers Act and Rules 204-2(a)(3) and 206(4)-7 thereunder. Without admitting or denying the findings, Pennant agreed to a cease-and-desist order, censure, and to pay a $400,000 civil penalty.
The SEC’s order as to Elste found that he willfully aided and abetted and caused Pennant’s compliance violations under Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder. Without admitting or denying the findings, Elste agreed to a cease-and-desist order, censure, and to pay a $45,000 civil penalty
The SEC's investigation was conducted by Jonathan Katz and Paul Montoya of the Asset Management Unit in Chicago and Raven Winters of the Chicago Regional Office. The examination that led to the investigation was conducted by Bradley A. Kartholl, Sarah Niblock, Matthew D. Harris, and Louis A. Gracia of the Chicago Regional Office.