On November 10, 2011, the SEC brought charges against a San Diego-based investment advisory firm and its president for securities fraud based on its failure to disclose a conflict of interest to investors and falsely represented the liquidity of a hedge fund they managed.
The SEC claims that Western Pacific Capital Management LLC and its president, Kevin James O’Rourke, encouraged investors to purchase a security without informing them that Western Pacific received a 10% commission. Western Pacific and O’Rourke also (1) failed to register as a broker, (2) failed to give required written disclosures to investors, (2) wrongly redeemed one hedge fund client’s interest before another’s, and (4) materially misrepresented to clients about the fund’s liquidity.
According to Marshall Strung, an Assistant Director within SEC Enforcement Division, “Investment advisers have a fiduciary duty to act in the best interests of their clients and be forthcoming with them. Western Pacific and O’Rourke fraudulently breached that duty by failing to disclose the commissions they would receive for the recommended investments and lying to clients about the liquidity of the fund they managed.”
Specifically, the SEC alleges that Western Pacific and O’Rourke acted as brokers in the non-public stock offering by Ameranth Inc. during 2005 and 2006. In return, Ameranth paid Western Pacific a 10% “success fee.” Although Western Pacific and O’Rourke told investors to invest in Ameranth, they failed to advise each investor that they would make money off these investments, and failed to give investors the mandatory written disclosures as to their role in the offering.
Further, the SEC claims that from 2005-2008, Western Pacific and O’Rourke falsely represented the liquidity of The Lighthouse Fund LP, a hedge fund that they formed and managed. Western Pacific and O’Rourke always maintained that illiquid assets comprised only 25% of the Lighthouse Fund, when in reality 90 percent of the fund’s assets were comprised of illiquid securities.