The Securities and Exchange Commission
The back story: The SEC says its investigators found that while pitching Simran Capital Management's services, Umesh (Mesh) Tandon, the firm's CEO, falsely certified to CalPERS that his firm satisfied its minimum requirements over AUM.
Tandon struck a settlement deal, neither admitting nor denying charges, the SEC says; adding that he agreed to be barred from the securities industry and pay $100,000 as penalty, disgorgement of $20,018, and prejudgment interest of $1,680. CalPERS has since severed ties with Simran Capital Management.
Tandon did not respond to phone calls and emails requesting comment.
RISKS OF INFLATION
According to the SEC, Tandon represented to CalPERS in May 2008 that Simran met explicit AUM requirements and managed at least $200 million as of December 31, 2007. At the time, Simran actually managed approximately $80 million, the SEC says: "Evidence indicates that Tandon was aware that Simran did not meet the CalPERS requirements for AUM."
Tandon also touted Simran's relationship with CalPERS to other prospective clients from 2008 to 2011, and instructed other Simran employees to do the same, the SEC says. On more than a dozen occasions, Tandon and Simran employees falsely inflated the firm's AUM in communications with employee retirement systems and other prospective clients, the SEC says.
In February 2012, Simran withdrew its SEC registration as an investment advisor and has since ceased operations. However, it continues to maintain a website listing Tandon as its president. Despite the SEC allegations, his LinkedIn profile indicates that his former company was awarded "Hedge Fund of the Year" at a 2008 Emerging Manager Summit. Roughly two weeks ago, he started a new job at Active Capital Management, according to a spokesman at his new firm.
HONEST MISTAKE?
Dan Bernstein of MarketCounsel, a regulatory compliance and business consulting firm for advisors, says some advisors could make an honest mistake on assets under management figures. The SEC defines AUM in the instructions to Part 1 of its Form ADV, Bernstein says; but he adds that "sometimes AUM isn't common sense, and advisors do a bad job quantifying it. Bernstein says the new version of form ADV Part 2, which allows advisors to define AUM differently if they disclose their methodology properly, further confuses the issue.
Yet there are other reasons a firm might try to pump up its numbers. Some may be tempted to inflate their assets to register with the SEC, rather than state regulators -- which requires a minimum of $100 million in AUM -- or meet specific customer mandates.
"Another reason we're seeing inflated AUM more frequently is advisors trying to make themselves look better to get new clients, or to avoid showing clients that they're bleeding assets and have a domino effect of clients leaving them," Bernstein says. "They think 'if i could just hold onto assets for another quarter . And on the institutional side, some institutions won't even deal with an advisor unless they're a certain size."
But advisors should beware: The risks of inflating AUM include enforcement, fines, suspension and, perhaps even more damaging, reputational damage. Bernstein says: "These risks can be the scarlet letter for financial advisors."
