Co-Owner of Defunct New York-Based Private Equity Firm Consents to Judgment for Defrauding Advisory Clients

23/10/2018/US SEC

On October 16, 2018, the Securities and Exchange Commission charged the two co-owners of a now-defunct New York-based private equity firm with defrauding the firm’s advisory clients and pocketing millions in fees. One of the co-owners consented to a judgment, which was entered on October 19, 2018, without admitting or denying the allegations, permanently enjoining him from violating the antifraud provisions of the federal securities laws.

The SEC’s complaint alleges that, from March 2013 to February 2014, Alexander C. Burns, the majority owner and control person of Southport Lane Management, LLC, acquired insurance companies and thereby obtained the ability to control the investment decisions for the insurance companies and those companies’ related reinsurance trusts. Burns allegedly used fraudulent transactions, which he recommended through his affiliated registered investment adviser, Southport Lane Advisors, LLC, to covertly steal money from the insurance companies and related reinsurance trusts. Burns’s alleged scheme ultimately led to at least five insurance companies having insufficient assets to pay policyholder claims, and the companies were placed into receivership. The SEC further alleges that Andrew B. Scherr, a co-owner of Southport Lane, aided and abetted Burns’ fraud by acquiring assets that were worthless or overvalued and which were sold by Burns to his advisory clients.

The SEC’s complaint, filed in federal district court in Manhattan, charges Burns with violating the antifraud provisions of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1), (2), and (3) of the Investment Advisers Act of 1940, and with aiding and abetting violations of Section 17(a)(2) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5(b) thereunder, and Sections 206(1), (2), and (3) of the Advisers Act by the affiliated private equity firm and investment adviser. The complaint also charges Scherr with aiding and abetting Burns’ violations of Sections 206(1) and (2) of the Advisers Act. The complaint seeks permanent injunctions, disgorgement and civil penalties. Without admitting or denying the allegations in the SEC’s complaint, Burns consented to the entry of a judgment permanently enjoining him from violating the charged provisions of the federal securities laws. The judgment further provides that the payment of disgorgement plus prejudgment interest, and the imposition of civil monetary penalties, will be determined at a later date.

The SEC’s investigation was conducted by Nathaniel I. Kolodny, John Lehmann, Doreen Rodriguez and Thomas P. Smith, Jr. of the New York Regional Office, and was supervised by Lara S. Mehraban. The SEC’s litigation against Scherr will be led by Kevin McGrath and Mr. Lehmann.

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