In 2012, at the request of an investor in one of its funds, the SEC launched an inquiry into the investments of Headline Capital Management and my role as its investment manager. After over three years of fact gathering, the SEC came to the conclusion that I had failed to properly disclose the nature of some of these investments and that the fact that I personally invested in some of these investments was a sign that I was operating with a conflict of interest and not in my investor's best interest. The end result is that I will have to pay a fine for these civil violations to the SEC.
Unfortunately, when the SEC reports these findings, it is reported as "fraud" and any press release related to the matter will use this term. I believe that the use of the word "fraud" makes my actions look far more egregious than they actually were. This post is meant to explain my side of the story and what really happened over the course of events.
Let's start with some basic facts. In 2003, I launched Headline Group as a fund investing in a strategy to exploit inefficiencies in the market. I ran the fund with this sole strategy until 2007. In 2007, with our solid returns and with assets growing to over $20 million, it was no longer possible to only trade this strategy. Our trades were too large and we couldn't exploit the opportunity anymore. At this time, along with two new owners that had purchased an interest in the management company, we decided to expand into multiple strategies so we could continue to grow the fund. I disclosed to all investors that we would be expanding into multiple new strategies so that we could continue to produce returns and compliment our existing successful strategy.
Some of these new strategies were other market anomolies that I discovered and some were not. In 2007, everybody in the world was making money in real estate and other non-liquid investments. At the time, these seemed like a great avenue to achieve returns outside of our current strategy (not such a great idea in hindsight). So, in 2007, partnering with a real estate developer, we put together several real estate partnerships and Headline was an investor in these partnerships. I, as a believer in these investments, also invested in these partnerships personally with the same rights and restrictions as the Headline investors. Also, around this time, a private equity opportunity was presented to us and I again personally invested in this opportunity along with Headline. In total, these investments were only 15% of the total money in the fund at the time.
The SEC argues that I should have provided full disclosure on these investments and that failing to do so was fraudulent. I counter that our investment documents were very clear that as the investment manager, I had the right to invest in anything I thought would be a good investment. It was even clear in our documents, signed by every investor, that I may co-invest in these investments if I chose to. Nothing that I did during that time appeared to me as any violation of our partnership agreements or with SEC regulations. In fact, back in 2009 during a random audit, the SEC looked into these investments and determined that we were not doing anything wrong. If I had any doubt about what were doing then, they were put to rest during that initial audit by the SEC.
Unfortunately, as investments often do, particularly in 2007 and 2008, these private investments did not pan out over time. At the same time, our other strategies were also not working and investors started to pull money out in 2009 thru 2011. Over time, as investors made withdrawals, these private investments became a significant size versus the overall assets and in 2012 I had to stop investors from pulling money out until we could liquidate what was left. This is when the SEC launched its investigation.
In hindsight, I am definitely not without fault here. I should have provided more detail to investors on what we were doing at the time. I made the mistake of thinking that I was not required to because our agreements gave us the right to invest in whatever we wanted, and that since they were such a small part of the overall fund, they were not material. When the SEC gave us a clean bill of health in 2009, I thought for certain we were within the guidelines of our documents and the rules.
As testament to the fact that I was not seeking personal gain from other's investments, I'd like to point out the following:
Some of the investors in these funds may lose money as a result of these illiquid investments. For that, I am truly and deeply sorry. But this was not done for self gain at the expense of others. These were poorly timed investments that could have been handled better. I will continue to do everything I can to mitigate the damage and return as much money as possible to investors remaining in these investments. To suggest that I was personally benefitting at the expense of our investors is the exact opposite of the truth. I have always, and will continue to, sacrifice my personal gain to make investors whole.