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Adviser Liable for Fraud Involving Fictitious Client

Thursday, July 7, 2011
Tatiana Rodriguez | Bloomberg LawSEC Litigation Release No. LR-22025 (July 1, 2011); SEC v. Locke Capital Mgmt., C.A. No. 09-100 S., 2011 BL 173882 (D.R.I. June 30, 2011) The U.S. District Court for the District of Rhode Island granted the Securities and Exchange Commission's (SEC) motion for summary judgment against Newport-based investment adviser Locke Capital Management, Inc. (Locke Capital) and its founder and sole owner Leila C. Jenkins. The Court determined there was no genuine dispute of material fact with respect to Jenkins's fabrication of a fictitious client to bolster Locke Capital’s reputation and mislead investors. It held that Jenkins and Locke Capital’s conduct violated various securities laws and, among other things, ordered Jenkins to pay over $5 million in disgorgement and penalties. At the same time, the Court denied Jenkins's motion for summary judgment, concluding that her arguments were unsupported by competent evidence and immaterial to whether she was liable for securities violations; moreover, the Court determined, even if Jenkins’s arguments had been substantiated, they nonetheless would not have merited summary judgment. The SEC alleged that, to attract investors, Jenkins had created a fictitious "confidential" Swiss billion-dollar client to bolster the firm’s reputation as an investment adviser with significant assets under management. From 2003 to 2009, Locke Capital allegedly represented to investors—through brochures, meetings, online databases and SEC filings—that it managed more than a billion dollars in assets. According to the SEC, Locke Capital’s other client assets were small relative to those of its fictitious client. The SEC also alleged that Jenkins made false statements to SEC staff about the existence of the fictitious client. The SEC's motion stated, for example, (1) Jenkins provided a company name for the fictitious client for which no proof of existence could be located, (2) the “Swiss” client’s email log-in had a Rhode Island IP address, (3) the advisory fees the fictitious client purportedly paid were originally routed from Jenkins’s hedge fund, and (4) Jenkins created fake custodial statements from J.P. Morgan Chase to conceal her wrongdoing from the SEC. The Court held that Jenkins and Locke Capital violated Section 17(a) of the Securities Act of 1933; Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; and Sections 206(1), 206(2) and 207 of the Investment Advisers Act of 1940 (Advisers Act). The Court also held that Locke Capital violated Sections 204 and 206(4) of the Advisers Act, as well as Rules 206(4)-1(a)(5) and Rule 204-2(a) thereunder, and that Jenkins aided and abetted those violations; additionally, Locke Capital’s actions violated Section 204A of the Advisers Act and Rule 204A-1 thereunder. The Court enjoined Jenkins and Locke Capital from committing further violations of those laws, held them jointly and severally liable for disgorgement of $1,781,520 plus prejudgment interest of $110,956, and ordered each to pay a penalty of $1,781,520. Disclaimer This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy. ©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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