The SEC has initiated cease-and-desist proceedings against a portfolio management firm in upstate New York and its CEO for allegedly failing to disclose material conflicts of interest relating to the private funds it was recommending to advisory clients -- charges that the firm vigorously denies.
The commission is charging that Edgar R. Page and his firm, PageOne Financial, promoted three private funds to the firm's advisor clients while concealing an arrangement whereby one of the fund managers was set to acquire a 49% stake in the firm.
To finance that partial buy-in, the SEC alleges, the fund manager was relying on millions that Page had promised would come from investments made by his firm's advisory clients on his recommendation.
"The fund manager was paying for the acquisition by making a series of installment payments over time, the timing and amounts of which were, at least partially, tied to [Page and his firm's] ability to direct client money into the private funds," the SEC says in its order instituting proceedings against Page and his firm -- an RIA registered with the commission.
Page was unavailable to comment, but his attorneys contend that the charges are overblown, denying that there was any failure to disclose material information to clients or that Page had devised any scheme to finance the acquisition of his firm with clients' investments.
"Mr. Page and PageOne deny that they misled clients and we are preparing to try to case," says Richard Marshall, Page's co-counsel and a partner at the firm Ropes and Gray.
"There's no allegation that these were bad investments. There's no allegation that they weren't suitable," Marshall says. "The SEC admits that there was disclosure of a conflict -- the only question seems to be whether there was enough disclosure."
PageOne, headquartered in Malta, N.Y., provides portfolio management services and back-office support to advisors, and says it works with multiple custodians and platforms, including TD Ameritrade and Pershing. The firm reported assets under management of more than $215 million on its most recent Form ADV.
The SEC's order alleges an elaborate arrangement between Page and the fund manager to finance the acquisition of PageOne through client investments over a period roughly between March 2009 and September 2011. In that time, PageOne's advisory clients invested about $13 million in the funds in question, which were not registered with the SEC and were concentrated in real estate investments. Over roughly the same time, the fund manager paid more than $2.7 million toward the acquisition of a stake in PageOne, according to the commission.
Page was indeed working on a deal to sell a stake in his firm, his legal team says, but it maintains that the SEC's allegation -- that there was a quota-like arrangement that hinged the sale on channeling clients' assets to the fund manager -- is baseless.
"We do not believe that is true and we intend to contest that at trial," Marshall says.
The SEC alleges that Page, who served as his firm's chief compliance officer during the period in question, falsified information or made deliberately misleading statements on PageOne's ADV filings. At one point, the firm reported that it received an annualized referral fee from the fund manager that ran between 0.75% and 7%.
"However, as both respondents knew or recklessly disregarded," the SEC charges, "the fund manager's payments were not referral fees, but rather installments on the acquisition of PageOne."
The order continues: "During that same period, those payments totaled more than 20% of the PageOne clients' investment in the private funds."
The SEC alleges other "similarly misleading" disclosures about PageOne's relationship with the fund manager, saying that Page failed to mention the potential acquisition and, at one point, erroneously described his relationship with the fund manager as a paid consultant.
'CLIENTS WERE TOLD'
Page's legal team counters that, even if there were any omissions or misstatements on the ADV filings, they were minor, and nonmaterial to the investment recommendations made to clients, who were apprised of the conflicted relationship between PageOne and the fund manager.
"Even if the ADV is inaccurate, it's not materially inaccurate. It disclosed a significant conflict.
Our defense is going to be it was not a material nondisclosure," Marshall says. "The fact of the matter is the investments were good investments, and the clients were told."
The SEC's order describes the fund manager as having "limited liquidity," which meant that the transaction was contingent on Page raising money for the purchase through investments in the private funds. The partial acquisition ultimately fell through, and Page and the fund manager are embroiled in a separate dispute over the breakdown of the deal.
As of Wednesday, Page and his legal team had not been served with the SEC's order, despite its publication on the commission's website. Once the order is served, Page and his attorneys will have 20 days to formally respond, and a public hearing before an administrative law judge on the matter is set to be scheduled within one to two months.
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