The US Securities and Exchange Commission (SEC) has charged Apex Fund Services for failing to “heed red flags” and address fraudulent accounting on the part of two of its clients.
Private fund administrator Apex has agreed to pay a total of $352,449 to settle the charges, although it has not admitted or denied the SEC’s findings.
The charges relate to ClearPath Wealth Management and EquityStar Capital Management, both of which have also been charged with fraud.
A statement from the SEC said Apex “failed to heed red flags and correct faulty accounting by two clients.”
It went on: “Apex Fund Services missed or ignored clear indications of fraud while contracted to keep records and prepare financial statements and investor account statements for funds managed by ClearPath Wealth Management and EquityStar Capital Management.”
With regards to ClearPath and its owner Patrick Churchville, the SEC found that Apex failed to act appropriately after it detected undisclosed brokerage and bank accounts. It also turned a blind eye to loan agreements and transfers that violated fund offering documents.
Apex also did not correct previously issued accounting reports and capital statements, providing these to ClearPath and the funds’ independent auditor. ClearPath used these misleading reports and statements to communicate performance and positions to investors.
With regards to EquityStar and its owner Steven Zoernack, the SEC found that Apex accounted for undisclosed withdrawals totalling more than $1 million, despite a lack of evidence that Zoernack would be able to repay the withdrawals.
Although, according to the SEC, Apex did question these withdrawals and concluded that repayment would be unlikely, it did not properly account for them. This allowed the withdrawals to amount to more than a quarter of the net asset value of one fund, and more than half of another.
Apex also sent monthly account notices to investors that overstated the investors’ holdings in EquityStar funds. The SEC found that Apex either knew about these overstatements, or should have done.
Andrew Ceresney, director of the SEC’s division of enforcement, said: “Fund administrators are responsible for ensuring that fund records provide accurate information about the value and existence of fund assets.”
He added: “Apex failed to live up to its gatekeeper responsibility and essentially enabled the schemes to persist at each of these advisory firms until the SEC stepped in.”
For their parts, Churchville and ClearPath were charged with fraud in May last year. Zoernack and EquityStar were charged with fraud, and for deliberately misleading investors by actively covering up Zoernack’s criminal history and questionable financial record.
Apex’s total settlement of $352,449 comprises a voluntary $75,000 penalty for each firm, plus disgorgement of $96,800 plus interest of $8,813 for ClearPath and disgorgement of $89,050 and interest of $7,786 for EquityStar.
Apex said in a statement: “Apex does not admit or deny the SEC’s historical findings from 2012 but respect their decision and have made every effort possible to accommodate any requests for information.”
“We are satisfied with the resolution of the investigation, with a voluntary settlement amount of $150,000, and remain committed to full compliance with all legal and regulatory requirements globally. We will continue to fully cooperate with regulators on any matter brought to our attention in any jurisdiction.”
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