A Chicago-area hedge fund advisor who launched a hedge fund in his dorm room has been accused by the Securities and Exchange Commission of committing a multiyear fraud that involved the inflation of his fund’s values, cheating investors out of $1.4 million in fees.
The agency’s complaint names Samuel Barnett, 30, and the firm he founded, SBB Research Group LLC, an RIA to private investment funds. It also names Matthew Aven, 45, the firm’s COO.
The SEC says Barnett, Aven and SBB intentionally rigged the firm’s valuation model to inflate the recorded value of the funds’ securities and make their performance look much better than it actually was.
The complaint said the men used those manipulated values to report inflated net asset values to investors, and created a false track record for the funds, which they marketed to prospective investors. After the agency caught them, SBB, Barnett and Aven hid their misconduct from investors, the SEC claims.
Barnett of Evanston, Ill., founded the firm in 2010 while still in college and created SBB along with several funds under the LLC’s management. He then hired Aven of Deerfield, Ill., as his first employee. The firm raised millions from friends and family members.
At first, the funds were vehicles for investing the Barnett family fortune, the SEC said. But then the men sought outside investors. While promising tailored, innovative investment strategies, the agency said Barnett and company instead turned almost entirely to structured notes—debt holdings with hybrid security features issued by banks and other financial institutions.
The firm promised prospective investors they would use “fair value” when recording investments, according to generally accepted accounting principles. In other words, SBB promised to value each fund's notes at an exit price (the price at which the notes could be resold to another party).
Instead, they used their own valuation model to artificially inflate the value of the structured notes.
“In reality, Barnett, Aven and SBB had no intention of complying with GAAP or determining an exit price,” the SEC complaint says. “Although Barnett and Aven had never worked for a hedge fund or created a valuation model, they thought that they knew better than the rest of the market.”
Starting in 2011, Barnett, Aven, and SBB rejected more than 50 years of standard valuation principles, ignored expert advice and created a home-brewed valuation model that radically departed from the norm, the complaint says. As a result, SBB misstated the funds’ historical performance and overcharged investors approximately $1.4 million in fees.