Securities and Exchange Commission Charges Florida Investment Adviser with Fraud (May 2020)

TCA Fund Management Group Corp. (“TCA”) and TCA Global Credit Fund GP, Ltd. (“GP” or “Fund”, and with TCA, “Defendants”), a Florida based registered investment adviser, was charged by the Securities and Exchange Commission (“SEC”) with fraudulently engaging in revenue recognition practices that inflated revenue and the net asset value (“NAV”).(1) TCA was compensated based on the NAV of the funds and GP was compensated on the amount of the funds’ profitability.
The SEC’s complaint charges that since 2010 and continuing through at least November 2019, TCA fraudulently engaged in revenue recognition practices that inflated revenue and NAV using two methods.

1. 1. Between April 2010 and December 2016, the Fund’s lending business would recognize revenue from loan fees when nonbinding term sheets were executed. Recognizing these fees at the execution of the term sheet artificially increased profits and NAV until the revenue was actually earned at the time of the loan closing or removed from the books if the loans never closed.
   2. Between the second half of 2016 and November 2019, TCA would recognize investment banking fees as revenue at the time investment banking services agreements were signed even though (a) these companies lacked the financial wherewithal to pay the fees unless the Fund was able to successfully secure financing, which rarely occurred, and (b) the Fund had provided few if any services to the companies at the time of the agreement.

Per the SEC’s complaint, these practices caused GP to report to investors that they were profitable every month, with an ever-increasing NAV. In truth, the practices led to overstated NAV by as much as $29 million from the loan fees and $130 million of investment banking fees. For 2018 the Fund’s auditor issued a qualified opinion including $61.6 million in investment banking income (47% of total) and $384 million in assets (89% of total). Many of the Fund’s loans are now in default, including 46% currently in litigation and as of January 2020, the Fund is winding up affairs.

The SEC’s complaint charged the defendants with violations of Section 17(a)(1), (2) and (3) of the Securities Act, violation of Section 10(b) and Rule 10b-5(a), 10b-5(b) and 10b-5(c) of the Exchange Act, violation of Section 206(1), (2), (4) and Rule 206(4)-7 and 8(a) of the Advisers Act, and violation of Section 207 of the Advisers Act.

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1. https://www.sec.gov/litigation/litreleases/2020/lr24815.htm

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