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From Securities Regulation Daily, December 30, 2014

Advisory firm, execs siphoned fund assets for frail side business, SEC charges

By Amy Leisinger, J.D.

The SEC has charged New York-based investment adviser VERO Capital Management, LLC and three fund managers with fraudulently diverting investor money for their own use and to provide support to an emerging side business. According to the order instituting an administrative proceeding, together with the firm, VERO co-owners and officers Robert Geiger, George Barbaresi, and Steven Downey also failed to comply with applicable custody requirements, including audits and surprise examinations, and failed to disclose, or obtain consent for, certain principal transactions (VERO Capital Management, LLC, Robert Geiger, George Barbaresi, and Steven Downey, CPARelease No. IA-3991, December 29, 2014).

In a press release, Andrew M. Calamari, director of the SEC’s New York Regional Office, said: “VERO Capital and its officers allegedly misled their investors about the funds’ investment activities and funneled money to their side project while winding down the funds.” 

Allegations. The SEC states that, through VERO, Geiger, Barbaresi, and Downey managed a pair of funds, structured in a master-feeder relationship, designed to invest primarily in mortgage-backed securities. VERO marketed the feeder fund to three investors and raised approximately $80 million in exchange for notes issued by the fund. The fund thereafter purchased mortgage-related notes worth a total of $7 million from one affiliated and two non-affiliated companies involved in real estate investments, which thereafter defaulted and became subject to asset freezes in enforcement proceedings, respectively. According to the SEC, VERO and the officers did not provide notice to the funds of, or obtain the required consents for, these transactions.

After deciding to wind down the funds, the SEC alleges, the respondents diverted $4.4 million from the funds by causing them to make undocumented “bridge loans” to VERO’s new risk management subsidiary, Gresham Risk Partners LLC. The respondents deceived the funds’ custodial bank to withdraw a portion of this amount from their bank account and funneled a portion of the amount finally returned on the unaffiliated companies’ notes to Gresham, the SEC alleges. According to the SEC, neither the loans nor the withdrawals were disclosed to investors or the funds’ director until they appeared in the master fund’s audited financial statements. In fact, the Commission states, while the respondents were channeling funds to Gresham, they were actively concealing the transactions and reassuring investors that VERO was striving to liquidate remaining investments for redemption. During this time, VERO also had custody of client assets but failed to have the funds audited by independent auditors or to arrange for surprise examinations, according to the SEC. 

By their conduct, the SEC alleges, the respondents willfully violated the antifraud provisions of Advisers Act Sections 206(1), 206(2), and 206(4) and Rule 206(4)-8. In addition, the SEC contends that VERO willfully violated the custody and principal-transaction requirements of Sections 206(3) and 206(4) and Rule 206(4)-2 and that Geiger, Barbaresi, and Downey aided and abetted and caused these violations.

Forthcoming action. The matter will be scheduled for a public hearing before an administrative law judge, and the respondents must file an answer to the Commission’s allegations within 20 days.

The release is No. IA-3991.

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