An investment adviser has been fined for playing a shell game with client funds during the 2023 banking crisis.

The SEC settled charges against LDP Partners LLC (LDP) and its manager, Himalaya Rao-Potlapally, of mismanaging the funds of its sole client, the BFM Fund, and publishing misleading financial statements about the money’s location. LDP and Rao-Potlapally were also accused of securing improper advance fees.

These missteps all arose from apparent go-aheads from the BFM Fund’s advisory committee. However, that committee was only allowed to provide ad hoc advice, but not authorization, to LDP and Rao-Potlapally’s financial decisions.

Breach of duty

On March 10 2023, the day of the failure of Silicon Valley Bank, LDP decided to withdraw $600,000 of a total sum of $820,831 from the BFM Fund’s bank account and distribute it across three accounts the BFM fund did not control.

LDP’s stated concern was that the money in the original bank account would not be insured by the Federal Deposit Insurance company (FDIC) in the event of the bank’s collapse.

Despite the fact that this move was endorsed by the BFM Fund’s advisory committee, that committee was not empowered to authorize final decisions regarding the fund’s financial management.  

The SEC also accused LDP and Rao-Potlapally of holding onto the money for longer than necessary even if those fears were valid. Even after discovering that the funds would be FDIC insured in April 2023, they did not return the funds to their original account until August and September of that year, and only after being prompted by SEC staff.

The SEC stated that this withdrawal created a conflict of interest, because the funds became directly controlled by Rao-Potlapally, including in one account that was jointly owned by herself and her spouse.

Misleading statements and unauthorized advances

The SEC also charged LDP and Rao-Potlapally with making misleading statements concerning the unauthorized withdrawals.

In July 2023, LDP and Rao-Potlapally indicated in a financial statement that the funds were still in their original account. They did not update this information until November, when they disclosed the March withdrawals to the BFM Fund.

The SEC also charged LDP and Rao-Potlapally for receiving $55,000 in advance management fees. Like the withdrawals, these advance fees were authorized by the advisory committee, but violated the BFM Fund’s governing documents.

Rao-Potlapally has agreed to pay $10,000 to the SEC for all the instances of misconduct.

Rule violations

For the mishandling of client funds, misstatements and receiving unauthorized advance fees, LDP and Rao-Potlapally were accused of violating:

• Sections 206(2) of the Advisers Act, covering fraud or deceit on a client, and;
• 206(4) of the Advisers Act and Rule 206(4)-8 thereunder, covering fraud, omissions or misstatements in pooled investment vehicles.