Compliance Corner: SEC Charges Ex-Racecar Team Boss; Pays Whistleblowers $50 Million

Editorial Staff, 26 April 2021


In one of the cases, the regulator paid its second-highest amount to co-whistleblowers for bringing major wrongdoing to light. In the other case, it charged a former owner of a race car team and an investment advisor for fraud.

Securities and Exchange Commission
The Securities and Exchange Commission has charged Andrew T Franzone, former owner of a race car team, and investment advisor FF Fund Management, with fraudulently raising and misappropriating tens of millions of dollars from the sale of limited partnership interests in a private fund, FF Fund I LP.

The regulator claims that Franzone, the sole owner and principal of FFM, defrauded investors by making misrepresentations regarding the fund's strategy and investments, failing to eliminate or disclose conflicts of interest, misappropriating fund assets, and falsely representing that the fund would be audited annually. 

According to the SEC’s complaint, from August 2014 through September 24, 2019, Franzone told potential and existing investors that his investment strategy for the fund was to maintain a highly liquid portfolio primarily focused on options and preferred stock trading. Franzone allegedly raised more than $38 million for the fund from about 90 investors through these representations.

In reality, as alleged in the complaint, Franzone diverted substantial fund assets to an entity he owned and invested the fund's remaining assets mainly in highly illiquid private companies and real estate ventures. The complaint also alleges that Franzone's management of the fund was subject to numerous conflicts that he did not eliminate or disclose, and that he misused fund assets. 

In one case, Franzone took personal loans from the founders of at least two companies in which the fund invested, pledged fund assets to secure other loans for his own personal benefit, and misappropriated fund assets for personal uses, including the purchase of a garage to store his private race car collection, the SEC alleged. Franzone and FFM allegedly removed a critical safeguard for investors by failing to have the fund audited annually despite representations saying that they would do so. 

The fund filed for bankruptcy under Chapter 11 in the Southern District of Florida on Sept. 24, 2019.

The SEC's complaint, filed in a federal court in Manhattan, charges Franzone and FFM with violating the antifraud provisions of the federal securities laws and seeks disgorgement of ill-gotten gains, civil penalties, and permanent and conduct-based injunctive relief.

In a parallel action, the US Attorney's Office for the Southern District of New York today filed criminal charges against Franzone.

The investigation is being conducted by Marie K N DeBonis, HelenAnne Listerman, Margaret M Vizzi, and Brian Fitzpatrick. The case is being supervised by Corey A Schuster of the Asset Management Unit. The SEC's litigation will be led by Duane K Thompson and supervised by Jan Folena. The SEC is being represented in the fund's bankruptcy by David W Baddley under the supervision of Alistaire Bambach. 

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