Investment Adviser Fined $1.4 Million For Failure To Disclose SPAC Conflicts
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  • Investment Adviser Fined $1.4 Million For Failure To Disclose SPAC Conflicts

    On May 31, 2023, the United States Securities and Exchange Commission (SEC) fined a New York investment adviser (Investment Adviser) $1.4 million for allegedly failing to disclose conflicts of interest regarding special purpose acquisition companies (SPACs).  In the Matter of RTW Invs., L.P., SEC Administrative Proceeding 3-21473 (May 30, 2023).  According to the SEC, Investment Adviser personnel sponsored two separate SPACs while those same personnel simultaneously invested client funds in the SPACs, which the SEC alleged was a conflict of interest that required disclosure.  The Investment Adviser neither admitted nor denied the allegations in the SEC’s Order.

    The SEC alleged that the Investment Adviser violated the Investment Advisers Act of 1940 (Advisers Act) and the Securities Exchange Act of 1934 (Exchange Act) by failing to disclose material conflicts of interest to its investors and failing to maintain controls sufficient to prevent such conflicts from arising.  Section 206(2) of the Advisers Act makes it unlawful for any investment adviser to “engage in any transaction, practice or course of business which operates as a fraud or deceit upon any client or prospective client.”  Further, Section 206(4) and Rule 206(4)-7 promulgated thereunder require registered investment advisers to adopt and implement written compliance policies and procedures reasonably designed to prevent violations of the Advisers Act, and Section 13(d) of the Exchange Act and Rule 13d-2 promulgated thereunder require persons who own more than 5% of the stock in a given company to disclose that stake and to further disclose any material increase or decrease in the size of that stake.

    The SEC alleged that, from December 2018 through May 2020, the Investment Adviser formed the two SPACs, with the Investment Adviser’s supervised persons acquiring roughly one third of the founder shares of each SPAC, and the Investment Adviser’s funds acquiring the remaining founder shares.  According to the SEC, the Investment Adviser’s supervised persons caused the Investment Adviser’s funds to purchase large chunks of common stock in the two SPACs when they closed.  The SEC alleged that, because the Investment Adviser and its personnel owned the  founder shares, the Investment Adviser and its personnel stood to gain from the completion of any transactions by the SPACs, even if those transactions could be harmful to the owners of the SPACs’ common shareholders, which in this case included advisory clients of the Investment Adviser.  This arrangement, according to the SEC, gave rise to conflicts of interest of which “[the Investment Adviser] failed to make timely disclosure” to its clients.

    These conflicts, the SEC alleged, were potentially exemplified by multiple investment decisions made by Investment Adviser personnel.  For example, in one instance, the SEC alleged that one of the Investment Adviser’s funds made a $25 million bridge financing investment to one of the SPAC’s target companies.  In another instance, the Investment Adviser’s funds allegedly purchased $9.2 million of common stock in one of the SPACs shortly before the SPAC’s shareholders voted to approve a proposed business combination.  These instances, the SEC alleged, showed that “[Investment Adviser] personnel had conflicts of interest that, among other things, could affect both whether or not the Investment Adviser selected certain investments on behalf of its advisory clients as well as the scope and size of such investments.”  The SEC also alleged that the Investment Adviser failed to adopt and implement written compliance policies and procedures reasonably designed to prevent these conflicts from arising, and that the Investment Adviser further failed to accurately report the various stakes held by it and its personnel to the SEC.

    The SEC did not impose any penalties beyond the $1.4 million fine.
    Categories: SECSPACs

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