SEC says asset manager invented client to pad AUM

Thomas Coyle

10 March 2009

Locke Capital invested a $1-billion client as a lure to win real money: SEC. Newport, R.I.-based investment manager Locke Capital Management invented a gigantic client whose assets it pretended to manage in a bid to attract real-life clients and money, the SEC says in a complaint against the firm and its principal Leila Jenkins.

The SEC charges Jenkins and Locke Capital with conjuring the supposedly massive client from thin air and then repeatedly lying about its existence to land flesh-and-blood clients. The SEC alleges that Jenkins lied to SEC staff about the existence of this client and furnished the SEC with fake documents in 2008, including bogus account statements.

Brazen web of lies

"Today's enforcement action demonstrates that investment who lure clients with false claims will be held accountable for their actions," says George Curtis, deputy director of the SEC's enforcement arm. "In this case, the conduct was particularly egregious because Jenkins lied to the SEC staff to try to escape detection."

Jenkins padded Locke Capital's AUM by claiming it was managing "more than $1 billion" for its made-up client in "confidential," Swiss-based accounts, and made continual and habitual mention of this fairy-land mandate in brochures, meetings, submissions to online databases from 2003 through part of this year.

"This brazen web of lies to investors constituted a serious breach of fiduciary duty," said David Bergers, Director of the SEC's Boston Regional Office.

Locke Capital managed $1.3 billion on 11 February 2008, according to the firm's latest -- and probably last -- ADV filing with the SEC. In other words, the SEC contends that the firm's real assets under management came to a small fraction of the imaginary portion.

The SEC adds that Jenkins misrepresented Locke's performance for years in which Locke had no clients and deceived clients about the makeup of the firm, including the number, identity, and role of its employees.

Lady Sinclair

But Jenkins' attorney Edmund Searsby tells the Wall Street Journal that Jenkins and Locke Capital haven't misappropriated or hidden a cent and that the firm has "significantly outperformed in the recent difficult times in the market."

Searsby, chairman of the white-collar crime, antitrust, and securities-litigation practice at Cleveland-based law firm McDonald Hopkins, says Locke Capital "intends to contest the SEC's allegations in court."

A 2005 biography of Jenkins from a cached version of Locke Capital's website says she was president and research head for Boston-based broker-dealer Whitehorne & Co. before she joined Locke Capital in 2003. Before that, she was with Bankers Trust (now part of Frankfurt-based Deutsche Bank) in New York and London, ultimately as its chief of emerging-markets investment management. In 1982 she co-founded broker-dealer Shields & Company.

Jenkins married Malcolm Sinclair, a U.K. politician and (as the twentieth Earl of Caithness) a member of the peerage of Scotland, in 2004; they have since divorced. -FWR

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