Federal securities laws are largely disclosure-based; absent any misconduct, a fund adviser that appropriately discloses and follows its investment strategy will not generally be liable to investors for losses sustained by the fund. However, as evidenced by a recent SEC enforcement action, broad disclosures about permissible investments will not shield a manager that departs wholesale from a fund’s stated investment strategy. The SEC recently settled charges that an investment adviser violated numerous antifraud and other provisions of the federal securities laws when it abruptly changed from its stated long distressed debt strategy to a net short position without appropriate disclosures. This article summarizes the facts underlying the proceeding, the SEC’s specific charges and the sanctions imposed on the respondents. For another recent enforcement action involving style drift, see “Appropriately Crafted Disclosure of Conflicts of Interest Can Mitigate the Likelihood of an Enforcement Action Against an Investment Adviser
,” Hedge Fund Law Report, Vol. 8, No. 40 (Oct. 15, 2015). See also “To What Extent Is a Hedge Fund Bound, Legally and Practically, by Its Strategy as Stated in Its Governing Documents and at Marketing Meetings?
,” Hedge Fund Law Report, Vol. 2, No. 49 (Dec. 10, 2009).