SEC fines fintech crypto fund that promised 2,700% returns
Titan Global Capital Management to pay $1m to those it advised without admitting fault
A New York fintech biz is set to pay $1 million in fines under a US Securities and Exchange Commission order that claims it advertised "annualized" returns on Titan Crypto of up to 2,700 percent, a number based on a "purely hypothetical account."
Titan Global Capital Management provided investment strategies to clients and prospective clients solely through a mobile app, the SEC said.
According to the Wall St watchdog, Titan neglected to tell its retail investors that the "2,700 percent" returns were extrapolated from a hypothetical period of just three weeks during which no actual trading occurred.
The SEC's order [PDF] states:
Titan did not disclose in the advertisements that the 2,700 percent annualized return was based on a purely hypothetical account in which no actual trading had occurred, that this annualized return had been extrapolated from a period of only three weeks (from August 10, 2021 to August 31, 2021), that the hypothetical return for this three-week period was calculated at 21 percent, that the projected 2,700 percent annualized return was based on the assumption that the Titan Crypto strategy would continuously generate a 21 percent return every three weeks for an entire year, or Titan's views as to the likelihood that this assumption would bear out.
If true, that's worse than some of the most egregious run rates math The Reg has seen in its time, and it has seen a lot of deliberately over-optimistic tech startups come and go.
Among other charges, the company is also accused of inserting a hedge clause that created a "false impression" to Titan Global Capital Management's retail clients, implying they had waived what are actually non-waivable causes of action provided by US state or federal law.
A hedge clause is a liability disclaimer, and this particular one included the wording: "[Client] will defend, indemnify and hold [Titan] harmless from any and all Losses sustained by [Titan] arising out of or in connection with (i) any breach of this agreement by Client... Titan and its Indemnified Persons will not be liable for any indirect, special, incidental, non-compensatory, punitive or consequential damages or other losses (regardless of whether such damages or other losses were reasonably foreseeable)."
This is a problem because advisers have a fiduciary duty not to mislead their clients into giving up their legal rights, the SEC says, adding in its order that it believes Titan's hedge clause violated Section 206(2) of the Advisers Act.
That particular act is actually new legislation brought in by the SEC last year, and Titan Global Capital Management is the first to come a cropper under it, says the agency. The amendments to the Investment Advisers Act are supposed to replace "broadly drawn limitations" in the current rules – which hadn't been updated since 1940 – with more principles-based provisions.
Among the situations the new marketing rule is trying to prevent is when financial advisers, in pushing their wares, make "an untrue statement of a material fact," or discuss potential benefits "without providing fair and balanced treatment of any associated material risks or limitations." There's more on the new regs here.
The regulator called the charges a "warning" to investment advisers about how they can market offerings. Osman Nawaz, SEC Chief of Enforcement's Complex Financial Instruments Unit, said in a statement: "Titan's advertisements and disclosures painted a misleading picture of [certainty] of its strategies for investors."
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The agency said Titan "cooperated with the investigation" and under the order consented to the entry of the finding that it violated the Advisers Act.
It went on to allege that after conducting compliance reviews, Titan discovered a "widespread practice of applying client signatures to client account documents submitted to third-party custodians on behalf of Titan's clients."
It also noted that, since July of 2022, Titan had "voluntarily undertaken remedial measures to improve its compliance programs."
Titan now has to transfer just over $1 million into a "Fair Fund" account, says the order.
The SEC said: "Without admitting or denying the SEC's findings, Titan agreed to a cease-and-desist order, a censure, and to pay $192,454 in disgorgement, prejudgment interest and an $850,000 civil penalty that will be distributed to affected clients."
We've asked Titan to comment. ®