In the investment advisory world, a positive performance report of an investment account means everything. Unfortunately, in the case of Vineet Kalucha, the Chief Investment Officer (“CIO”) of the New York-based hedge fund advisory firm Aphelion Fund Management, the altering of a performance report done by an outside auditing firm on one of his accounts has led to multiple charges by the Securities and Exchange Commission (“SEC”). In a May 7, 2014 press release, the Commission cited the firm with antifraud violations, and placed a temporary restraining order, froze client assets, and imposed a temporary bar of new client solicitations on the firm.
While Kalucha was the primary performance falsifier, the Commission additionally alleged that Aphelion’s Chief Financial Officer (“CFO”), George Palathinkal1, knew of Kalucha’s manipulation of performance from “an investment loss (of 3%) into a major investment gain (of 30%) in the account”. The falsified report, however, was ultimately distributed to investors, along with other false information about Kalucha’s assets under management (stated as $15 million or more in a year, though the firm never had more than $5 million at any one time in a year) and his litigation history, in which he covered up charges by the Department of Labor of a breach of fiduciary duties for managing retirement plans. Kalucha, a majority owner and managing partner, also used more than 40% of the investor funds raised in 2013 for his own personal gain, paying off luxury car payments, tax and accounting services, and personal legal settlements, including a home foreclosure settlement and a breach of contract settlement.
In the end, the benefits of an accurate performance report far outweigh the consequences of a falsified report. Maintaining current, valid fund account information, and assuring that compliance efforts are in place to help detect and mitigate internal fraud and wrongdoing, are among the efforts that help funds avoid such internal complications.
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1 On June 18, 2015, the SEC and Defendant George Palathinkal (“Palathinkal”) jointly stipulated that all claims asserted by the SEC against Palathinkal were dismissed with prejudice and without costs, and Palathinkal waived all rights of appeal. See http://www.valuewalk.com/wp-content/uploads/2014/05/Notice-of-Voluntary-Dismissal-as-to-Palathinkal-FILED-COPY.pdf. The SEC ordered that Palathinkal be barred from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization. See https://www.sec.gov/litigation/admin/2015/ia-4120.pdf.