Over the past several months, the SEC has embarked on
innovative and aggressive strategies to protect investors by stopping schemes
to defraud early in their development.
The latest example of the SEC’s new approach emerged earlier this month
when it announced the first deferred prosecution agreement with a former hedge
fund administrator who assisted the agency in taking actions against a hedge
fund manager who was stealing investor funds.
Never before had the SEC entered into a deferred prosecution agreement
with an individual.
According
to the agreement, Scott Herckis was the administrator of a Connecticut-based
hedge fund known as Heppelwhite Fund, LP, which was managed by its founder,
Berton M. Hochfield. Mr. Herckis
provided significant assistance to the agency by contacting authorities about
Mr. Hochfield’s conduct and producing records establishing the nature and extent
of Mr. Hochfield’s fraud. With the
information provided by the administrator, the SEC was able to quickly file an
emergency enforcement action to stop Mr. Hochfield’s misappropriation, which by
that time had resulted in $1.5 million in investor losses. The SEC not only stopped Mr. Hochfield’s
fraud in its tracks, the early action allowed the agency to be able to
distribute $6 million to the fund’s investors who were harmed by the
misappropriations.
Although
the SEC determined that Mr. Herckis aided and abetted the manager’s securities
law violations prior to blowing the whistle, the agency opted to enter into a
deferred prosecution with him rather than seek criminal liability. Under the agreement, Mr. Herckis is
prohibited from acting as a fund administrator for five years, cannot
associated with an investment advisor or registered investment company, and had
to disgorge $50,000 in fees earned as the fund administrator.
In a news release announcing the
agreement, an associate director in the SEC’s Division of Enforcement, Scott W.
Friestad, expressed the SEC’s commitment “to rewarding proactive cooperation that
helps us protect investors.” Recognizing
that “most useful cooperators often aren’t innocent bystanders,” Mr. Friestad
described the agreement as a way “to balance these competing considerations” by
holding Mr. Herckis “accountable for his misconduct but [it] gives him
significant credit for reporting the fraud and providing full cooperation
without any assurances of leniency.”
