by Greg Bright

The Securities and Exchange Commission in the US is coming after a start-up Australian funds management firm, Goldsky Asset Management, for misleading representations to potential investors. The SEC law suit shines a light on the Gold Coast-based firm which had a glittering celebrity launch just last year.

According to the SEC, Goldsky, which called itself a hedge fund manager, claimed to have several service providers – a custodian, administrator, auditor and prime broker – which it did not have. Also, it claimed to have had good investment performance when it had never, according to the SEC’s investigations, actually managed any money.

Perhaps the most bizarre aspect of the alleged fraud is the brazen way that the company was launched last year, with celebrity financier Mark Bouris making a speech to about 150 attendees at a resort in Kingscliff, on the far north coast of NSW. The launch was accompanied by the announcement of a new charity sponsored by Goldsky, called the “Sleep Safe Sleep Sweet” (SSSS) foundation. The evening was promoted in a local magazine, “Ocean Road”.

The SEC, in its suit against the firm and one of its principals, Ken Grace, says: “The Securities and Exchange Commission filed charges against an Australia-based investment adviser Goldsky Asset Management, LLC and its owner, Kenneth Grace, for making false and misleading statements about its business in filings with the Commission and on its website.” The SEC has had the help of Australia’s ASIC in its investigations.

Ken Grace and his wife, Janey Grace, listed as “president and executive assistant”, run the small business and say they put $100,000 into the foundation. They did not respond to an email request from Investor Strategy News for comment last week.

SEC’s statement says: “According to the SEC’s complaint, Goldsky’s Forms ADV filed with the Commission in 2016 and 2017, which Grace signed, stated that its hedge fund, Goldsky Global Alpha Fund, LP, had an auditor, a prime broker and custodian, and an administrator. In addition, in its Forms ADV and Forms ADV Part 2A, Goldsky stated that it managed over $100 million in discretionary assets under management. Goldsky’s website also claimed that Goldsky Fund earned: 19.45% compounded annual returns since inception, 70.33% compounded monthly returns since inception, and 25.30% returns for the year ended September 30, 2017. The SEC alleges that these statements were false and misleading because Goldsky, Grace and Goldsky Fund had no agreements with service providers, Goldsky and Grace did not manage $100 million of assets, and Goldsky Fund did not have any investment returns as it never had any assets.

“The SEC’s complaint, filed in federal district court in Manhattan, charges Goldsky and Grace with violating the antifraud provisions of Sections 17(a)(1) and 17(a)(3) of the Securities Act of 1933, Sections 206(4) and 207 of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder, or in the alternative, that Grace aided and abetted Goldsky’s violations. The SEC is seeking a judgment ordering permanent injunctive relief and civil monetary penalties against Goldsky and Grace.

“The SEC’s investigation has been conducted by Gerald Gross, James Hanson, and Jorge G. Tenreiro of the New York Regional Office. The litigation will be led by Mr. Tenreiro, and the case is being supervised by Sanjay Wadhwa. The SEC appreciates the assistance of the Australian Securities and Investments Commission in this matter.”

In a newsletter to clients last week, Castle Hall, a due diligence specialist firm, described the case as highlighting the first rule of due diligence: “trust but verify”.

Alex Wise, Castle Hall’s Australian office head, says: “’Trust but verify’ comes from a quote from Ronald Reagan, who used it when discussing the USSR during 1980s disarmament negotiations. The principle certainly rings true when dealing with investment manager due diligence.

“In Castle Hall’s due diligence process, our ‘Trust But Verify’ procedures encompass two key areas:

• Desk procedures to verify all external relationships claimed by the asset manager, at both the firm and the fund level.
• Onsite due diligence verification of internal documents to evidence that procedures operate as described.”