Lone Star picks up the tab for cross-trade activity that breached ’40 Act

The US Securities and Exchange Commission took action against Lone Star Management and its founder and fund manager, Jeffrey Eberwein, on February 24, 2020. The action concerned violations of the Investment Advisers Act of 1940 related to 21 trades during a two year period. 

In August 2014 and November 2014, Lone Star, while reporting to the Commission as an exempt reporting investment adviser, effected 19 interfund cross trades between two funds that Lone Star managed, and, in June 2015, while registered with the Commission as an investment adviser, effected two trades between a fund that Lone Star managed and a separately managed account (the “SMA”) for which Lone Star served as an investment adviser. These 21 trades were made on a principal basis because Eberwein’s ownership stake in the Lone Star fund involved in each of these trades was more than 35 percent  during the relevant time period. Lone Star failed to disclose in writing that it engaged in these principal transactions and did not obtain client consent before the completion of each of the transactions as required under Section 206(3) of the Advisers Act. Eberwein, Lone Star’s sole and managing member, CEO, portfolio manager and sole owner, caused Lone Star’s violations of Section 206(3) of the Advisers Act. 2. Lone Star also failed to implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder, a violation of Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder. Eberwein caused Lone Star’s violations of Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder. 

Lone Star was required to pay a penalty of $100k and Eberwein of $25k as a result.