Securities Lawyers Blog
September 18, 2013 The Securities and Exchange Commission (SEC) charged Shadron Stastney, a partner at a New York based hedge fund, Vicis Capital, LLC with breaching his fiduciary duties by engaging in undisclosed principal transactions in which he had a personal financial interest.
A principal transaction occurs when a registered investment adviser (RIA) acts as a principal for its own account and knowingly and intentionally buys securities from, or sells securities to a client. sells securities to, or buys securities from, a client. A principal transaction may also occur in situations where a controlling owner or an affiliate of the RIA engages in trades with the adviser’s clients. These transactions may lead to abuses, such as price manipulation, and the placement of unwanted securities in clients’ accounts—a practice known as “dumping.”
In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal transactions are potentially very harmful to investors and advisory clients. Principal transactions create the opportunity for RIAs to engage in self-dealing. Principal trading with clients is a clear conflict of interest that must be adequately disclosed to customers.