SEC Charges Hedge Fund Adviser and Top Executives with Fraud

Litigation Release No. 24680 / December 4, 2019

SEC v. SBB Research Group LLC, et al., No. 19-cv-6473 (N.D. Ill.)

The Securities and Exchange Commission charged SBB Research Group, LLC, a Chicago-area hedge fund adviser and its two top executives with a multi-year fraud that inflated fund values.

According to the SEC's complaint, SBB Chief Executive Officer Samuel Barnett founded the firm in 2010 while still in college, raised millions from friends and family members, and invested almost exclusively in structured notes. The complaint alleges that as SBB sought outside investors, Barnett and Chief Operating Officer and Chief Compliance Officer Matthew Aven promised prospective investors that they would use "fair value" when recording investments. Instead, they used their own valuation model to artificially inflate the value of the structured notes. As a result, SBB misstated the funds' historical performance and overcharged investors approximately $1.4 million in fees. According to the complaint, once the valuation issues were uncovered by SEC exam staff, the defendants took steps to conceal their fraud from investors and SBB's auditor. The complaint alleges that when SBB hired an outside valuation firm in 2016, performance for its flagship fund was slashed, and SBB surreptitiously credited investors for the overcharged fees but did not disclose the underlying problem.

The SEC's complaint, filed in the U.S. District Court for the Northern District of Illinois, charges: (1) SBB with violating Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, Section 17(a) of the Securities Act of 1933 ("Securities Act"), and Sections 206(1), 206(2), 206(4), and 207 of the Investment Advisers Act of 1940 ("Advisers Act") and Rules 206(4)-1, 206(4)-2, 206(4)-7, and 206(4)-8 thereunder; (2) Barnett with violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, Section 17(a) of the Securities Act, and Sections 206(1), 206(2), and 206(4) of the Advisers Act and Rule 206(4)-8 thereunder, and with aiding and abetting SBB's violations of Section 206(4) of the Advisers Act and Rules 206(4)-1 and 206(4)-2 thereunder; and (3) Aven with violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, Section 17(a) of the Securities Act, and Sections 206(1), 206(2), 206(4), and 207 of the Advisers Act and Rule 206(4)-8 thereunder, and with aiding and abetting SBB's violations of Section 206(4) of the Advisers Act and Rules 206(4)-1, 206(4)-2, and 206(4)-7 thereunder. The SEC seeks permanent injunctions and civil penalties against each defendant.

The SEC's investigation was conducted by Kevin Wisniewski and supervised by Jeffrey Shank, both of the Complex Financial Instruments Unit and the Chicago Regional Office, with assistance from Craig McShane and Max Gillman of the Chicago Regional Office and Chiu-Wang Chan of the San Francisco Regional Office. Timothy Leiman and Robert Moye will lead the litigation.