U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 23597 / July 18, 2016
Securities and Exchange Commission v. Thomas D. Conrad, Jr., et al., No. 1:16-cv-02572-LMM (N.D. Ga. filed July 15, 2016)
SEC Charges Father and Son and Their Investment Advisory Firms with Defrauding Hedge Fund Investors
On Friday, July 15, 2016, the Securities and Exchange Commission charged two residents of Alpharetta, Georgia, Thomas D. Conrad, Jr. and his son, Stuart P. Conrad, and their two unregistered advisory firms, Financial Management Corporation ("FMC") and Financial Management Corporation, S.R.L. ("FMC Uruguay"), with defrauding investors in a $10.7 million hedge fund primarily managed by Thomas Conrad.
According to the SEC's complaint, between 2010 and late 2014, Thomas Conrad directed preferential redemptions and other disbursements out of the hedge fund and its feeder funds to himself, Stuart Conrad, their extended family, and certain favored investors, while representing to other investors that redemptions were suspended. The complaint also alleges that Thomas Conrad arranged to increase his compensation from the hedge fund by appointing himself to be a sub-manager, for a fee, and that this additional fee and the related conflict of interest was not disclosed to investors. The complaint further alleges that, in offering literature given to prospective investors, defendants touted Thomas Conrad's significant experience in the securities industry, but failed to disclose his disciplinary history, which included an industry bar that the SEC imposed on him in 1971. Finally, the complaint alleges that, without disclosure to investors, Thomas Conrad titled certain fund assets in his name, rather than the fund's name.
The SEC alleges that Thomas Conrad, FMC and FMC Uruguay violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Exchange Act of 1934 and Rule 10b-5 thereunder and Sections 206(1),(2) and(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. The complaint further alleges that Stuart Conrad aided and abetted these violations. The SEC seeks permanent injunctions and civil penalties against all defendants, and disgorgement and prejudgment interest against Thomas Conrad, FMC and FMC Uruguay.