In In the Matter of Steven Zoernack, Securities Act Release No. 10051 (admin proc Mar. 8, 2016), the Securities and Exchange Commission (“SEC”) filed an order instituting administrative and cease-and-desist proceedings against Steven Zoernack (“Zoernack”) and EquityStar Capital Management, LLC (“EquityStar”) (collectively, “Defendants”) for alleged violations of Section 17(a) of the Securities Act of 1933 (“Securities Act”), Section 10b of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 promulgated thereunder, Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 and Rule 206(4)-8 promulgated thereunder.

According to the SEC’s allegations, from May 2010 through March 2014, Defendants violated anti-fraud provisions of the federal securities laws in connection with the offer and sale of interests in Global Partners Fund, LLC (“Global”) and Momentum Growth Fund, LLC (“Momentum”). In the order, the SEC alleged that Zoernack took extensive steps to conceal his criminal background and financial troubles. Specifically, the SEC claimed Zoernack paid an “internet-based search engine manipulator” to make negative information about himself “appear less prominently in search engine results.” 

Additionally, the SEC alleged Zoernack provided false and misleading information to Morningstar, an independent investment research firm, in order to obtain a five-star rating for the Momentum fund by indicating the fund had been in existence since 2009 with returns in the top 20% of all funds and had $120 million under management. The SEC asserted the fund had only been in existence since 2012 and the returns provided to Morningstar were the result of “back-testing,” not actual performance, and the fund never had more than $3 million in assets. Moreover, the SEC claimed Zoernack made misleading statements to investors about the performance of Global and Momentum funds by using the “back-tested” returns as actual performance and not disclosing that the results were based on “pro-forma back-testing.” Lastly, the SEC asserted that Zoernack misused investor’s funds by making unauthorized withdrawals in the amount of more than $1 million.

Section 17(a) of the Securities Act and Rule 10b-5 under the Exchange Act “prohibit fraudulent conduct in the offer and sale of securities and in connection with the purchase or sale of securities.” Furthermore, Sections 206(1), 206(2), 206(4) and Rule 206(4)-8 of the Advisers Act “prohibit making an untrue statement of a material fact . . . to any investor . . . in a pooled investment vehicle and engaging in any act, practice, or course of business that is fraudulent or deceptive with respect to any investor or prospective investor in a pooled investment vehicle.”

In light of the SEC’s investigation and allegations, the SEC deemed it “necessary and appropriate in the public interest that public administrative and cease-and-desist proceedings” begin to determine the validity of the allegations, and to determine  if any remedial action would be appropriate,  including but not limited to disgorgement and civil penalties. The SEC ordered a public hearing before an Administrative Law Judge, and ordered Defendants to file an answer to the allegations contained in the order.

The primary materials for this case may be found on DU Corporate Governance website.