SEC Enforcement Actions Against Mass Ave’s Compliance Failures

SEC Enforcement Actions Against Mass Ave’s Compliance Failures

SEC Enforcement Actions Against Mass Ave's Compliance Failures

The Securities and Exchange Commission (SEC) has taken significant legal actions against Mass Ave Global Inc. (MassAve) and its co-founder, CEO, and Chief Investment Officer, Winston Feng. The legal issues revolve around violations of the Investment Advisers Act of 1940 and the Investment Company Act of 1940. Here is a detailed breakdown of the legal implications:

Violations of the Investment Advisers Act of 1940

MassAve and Feng made materially false and misleading statements about the holdings and exposures of their flagship fund and other related funds from February 2020 through August 2022. These violations involved the dissemination of inaccurate information in various investor communications, such as monthly tear sheets, summary portfolio snapshots, and reports on top ten contributors and detractors to fund performance.

According to the SEC, MassAve’s actions violated Section 206(2) of the Investment Advisers Act, which prohibits any investment adviser from engaging in transactions, practices, or courses of business that operate as a fraud or deceit upon clients or prospective clients. The SEC determined that MassAve’s and Feng’s actions were fraudulent, as they knowingly provided false information to investors. This can be established through negligence, not necessarily intent. Furthermore, Section 206(4) and Rule 206(4)-8 of the Investment Advisers Act make it unlawful for any investment adviser to a pooled investment vehicle to make any untrue statement of material fact or to omit necessary information, resulting in misleading statements to investors. MassAve and Feng’s modifications to the underlying portfolio data, which were not reviewed by compliance, led to significant misrepresentations.

From at least September 2022 through February 2023, MassAve failed to disclose a significant conflict of interest. This conflict arose from the operation of a separate hedge fund in China by MassAve’s other co-founder, which overlapped with MassAve’s investment activities. Investment advisers are required to disclose any material conflicts of interest to their clients. The failure to inform investors about the co-founder’s separate hedge fund, which diverted attention and potentially impacted MassAve’s operations, constituted a breach of this duty. By not disclosing this conflict, MassAve and Feng again violated the antifraud provisions, misleading investors about the integrity and focus of their investment management.

MassAve also failed to adopt and implement adequate policies and procedures designed to prevent inaccurate information from being disseminated to investors. This failure was evident in the unreviewed modifications made by Feng, which were then shared with investors. Section 206(4) and Rule 206(4)-7 of the Investment Advisers Act require registered investment advisers to establish and enforce written policies and procedures reasonably designed to prevent violations of the Investment Advisers Act. MassAve’s inability to enforce these procedures allowed for the distribution of false information, violating this requirement.

Remedial Sanctions and Cease-and-Desist Orders

The SEC has imposed several sanctions on MassAve and Feng. MassAve is ordered to cease and desist from committing or causing any further violations of the Advisers Act and related rules. The firm must also pay a civil money penalty of $350,000 and has been formally censured. Winston Feng is similarly ordered to cease and desist from any future violations of the relevant provisions, must pay a civil money penalty of $250,000, and is suspended from association with any investment adviser, broker, dealer, and other financial entities for 12 months. This suspension prevents him from serving in various key roles within the financial industry.

Additionally, both MassAve and Feng cannot argue for offsetting their penalties in related private investor lawsuits, preserving the deterrent effect of these penalties. For purposes of bankruptcy proceedings, the findings in these orders are admitted by Feng, ensuring these penalties are not dischargeable.

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