Insights & News

Bad Facts Make Good Law for Investment Advisers

March 27, 2024
Client Alert

Interpreting the negligence standard applicable to investment advisers, the U.S. Court of Appeals for the Second Circuit has reversed a finding of non-scienter securities fraud against Mohammed Ali Rashid, a former senior adviser of Apollo Management LP (Apollo), a private equity firm registered as an investment adviser with the U.S. Securities and Exchange Commission (SEC). In October 2017, the SEC filed an enforcement action in the U.S. District Court for the Southern District of New York that alleged Rashid, acting individually as an investment adviser, breached his fiduciary duties to the funds he advised by submitting phony business expenses that were charged to and paid by certain Apollo funds. The SEC charged Rashid with violating Sections 206(1) and (2) of the Investment Advisers Act of 1940 (Advisers Act) for intentionally or, at the very least, negligently defrauding the funds.1

The district court held a nine-day bench trial, after which the judge determined that Rashid violated his fiduciary duty as an investment adviser to the funds but that his conduct was negligent, not intentional. The district court permanently enjoined Rashid from further violations of Section 206(2) of the Advisers Act and imposed a penalty of $240,000. Rashid appealed the lower court’s decision to the Second Circuit, and a divided panel reversed the lower court’s decision on March 13, 2024.

Bad Facts

Rashid managed several private funds at Apollo that invested in a variety of portfolio companies. The funds were structured as limited partnerships with partnership agreements that governed the allocation of certain expenses to the funds. There was no dispute that over the course of three years, Rashid knowingly and falsely described personal expenses as business expenses and submitted them to Apollo for reimbursement. Examples of Rashid’s phony business expenses included travel to “Montreal for a friend’s bachelor party, Miami for a friend’s wedding, Brazil for a vacation with his wife and New Orleans for the Super Bowl” as well as “expensive dinners and lavish gifts for his friends and family” and other personal expenses incurred at high-end hair salons, spas and clothing stores.

Read the full article here.

1 The complaint followed a 2016 settlement between Apollo and the SEC in which Apollo agreed to pay $52.7 million to resolve, among other claims, the SEC’s contention that Apollo failed to supervise Rashid.

Information contained in this publication should not be construed as legal advice or opinion or as a substitute for the advice of counsel. The articles by these authors may have first appeared in other publications. The content provided is for educational and informational purposes for the use of clients and others who may be interested in the subject matter. We recommend that readers seek specific advice from counsel about particular matters of interest.

© 2024 Stradley Ronon Stevens & Young, LLP. All rights reserved.

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