Home > News > Regulation > SEC Stops Allegedly Fraudulent Hedge Fund Offering that Raised $39 Million

RegulationMarch 17, 2020

SEC Stops Allegedly Fraudulent Hedge Fund Offering that Raised $39 Million

Manager is accused of misleading investors and using funds to buy luxury apartments.

The SEC has charged Florida-based investment adviser Kinetic Investment Group, and its manager Michael Scott Williams, in connection with an allegedly fraudulent unregistered securities offering that raised approximately $39 million from at least 30 investors to invest in a purported hedge fund. The regulator also obtained an asset freeze and other emergency relief against the company and Williams.

According to the SEC’s complaint, since at least 2013, Williams and Kinetic fraudulently raised the $39 million by making material misrepresentations to investors whom they solicited to invest in a purported hedge fund called Kinetic Funds I LLC. The SEC said Williams allegedly told investors Kinetic Funds’ largest sub-fund, Kinetic Funds Yield, invested solely in US-listed financial products, and that at least 90% of its portfolio was hedged using listed options. KFYield was also touted as a liquid investment.

However, according to the SEC’s allegations, Williams diverted a big chunk of KFYield investor capital to KCL Services LLC, which conducted business under the name Lendacy, which was a private startup company owned by Williams. Lendacy was neither listed on a US exchange nor capable of being hedged with listed options. Williams then directed Lendacy to make loans using KFYield assets to himself, entities controlled by him, and others. All told, Williams allegedly misappropriated at least $6.3 million through undisclosed loans to himself and his startups.

“Kinetic Group’s and Williams’ misrepresentations gave false comfort to investors that their investments would be secure and liquid,” Eric Bustillo, director of the SEC’s Miami Regional Office, said in a statement. “As alleged, however, Kinetic Group and Williams diverted a substantial portion of investor capital to Williams’ various business ventures and personal expenses.”

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Williams allegedly used more than $1.5 million to buy three luxury apartments and two parking spaces for himself in San Juan, Puerto Rico. He also allegedly used at least $2.7 million to purchase a historic bank building in Old San Juan, and other funds to pay off the mortgage on a house belonging to a relative.

When certain employees raised concerns to Williams about his use of KFYield funds to pay for the San Juan properties, Williams allegedly responded by saying he was expecting a future payout from the sale of an unrelated company and that he would pay the fund back at that time.

The order also said Williams expanded the company’s marketing materials in order to attract more investors. He arranged to have a description of KFYield and its performance information, assets under management (AUM), and holdings available on Bloomberg’s computer system, which allows viewers to access real-time financial data on companies.

The SEC said Williams allegedly took this step in order to make KFYield appear transparent and to give it a measure of credibility. He provided potential investors with Bloomberg reports about the KFYield strategy, although it was Williams who was responsible for the content and accuracy of the information provided to Bloomberg, not Bloomberg.

The US District Court for the Middle District of Florida also granted the SEC’s request to appoint Mark Kornfeld as receiver over Kinetic Group and the relief defendants.

The charges against Williams include violating the antifraud provisions of the federal securities laws and aiding and abetting Kinetic Group’s violations of the federal securities laws. The SEC is seeking injunctions, disgorgement of allegedly ill-gotten gains with pre-judgment interest, and financial penalties against Williams.

BlackRock Converts Money Market Portfolio to Environmental Fund

Fund will invest 80% in securities that meet its environmental criteria and contribute to the World Wildlife Fund.

By Michael Katz

BlackRock is converting its BlackRock Money Market Portfolio to the BlackRock Wealth Liquid Environmentally Aware Fund (WeLEAF), which the firm says is the first environmentally aware money market product dedicated for the US wealth market.

“Client interest in our LEAF series has revealed tremendous demand for sustainable liquidity management,” Thomas Callahan, BlackRock’s head of global cash management, said in statement. “WeLEAF was designed to answer the call of our private wealth distribution partners, who are seeking a money market fund product that appeals to the growing segment of their clients that care deeply about sustainability and climate risk.”

WeLEAF will seek to invest at least 80% of the value of its net assets in securities whose issuer or guarantor meets the fund’s environmental criteria. Under the fund’s investment policies, an issuer or guarantor may meet such criteria if it, at the time of the fund’s investment, it has a better-than-average performance in environmental practices.

According to the fund’s prospectus, when evaluating performance in environmental practices, BlackRock will use data or other environmental, social, or governance (ESG) risk metrics including ratings provided by independent research vendors in determining whether to invest in a security. The research vendors may consider one or more of the following factors: issuer or industry exposure to environmentally intensive activities, disclosures by an issuer around climate related issues and environmental matters, or specific targets or plans by an issuer to manage environmental exposures.

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The fund will not invest in securities issued or guaranteed by entities that derive more than 5% of their revenue from fossil fuels mining, exploration, or refinement, or that derive more than 5% of their revenue from thermal coal or nuclear energy-based power generation. It may also invest in “green bonds,” whose proceeds will be used to finance projects intended to generate what BlackRock deems is an environmental benefit.

However, the fund may also invest up to 20% of the value of its net assets in securities whose issuer and guarantor have a below average performance in environmental practices, are not evaluated by any independent research vendor, and do not otherwise meet the fund’s environmental criteria.

BlackRock said it will use at least 5% of its net revenue from management fees it earns through the fund to purchase and retire carbon credits either directly or through a third-party organization. The purchase of carbon credits will be made at least annually, with BlackRock maintaining the option to increase, decrease, or terminate these purchases in its sole discretion at any time.

The firm also has a licensing agreement with the World Wildlife Fund (WWF) in which it will contribute annually to the environmental nonprofit group to help further its global conservation efforts.

In January, BlackRock said it is making sustainability the central focus of its investment strategy for the $6.3 trillion it manages for clients. In his annual letter to CEOs, and another to clients, BlackRock CEO and founder Larry Fink announced several initiatives to make sustainability integral to the firm’s portfolio construction and risk management.

“Sustainability- and climate-integrated portfolios can provide better risk-adjusted returns to investors,” Fink said. “And with the impact of sustainability on investment returns increasing, we believe that sustainable investing is the strongest foundation for client portfolios going forward.”