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Applicant,
Civil Action No.
v.
Respondent.
(“Application”). For the reasons set forth below, and in the accompanying
Declaration of Kyle Bradley (“2/02/18 Bradley Decl.”) and the exhibits thereto, the
Commission asks that the Court enter an order, in the form attached to the
I. INTRODUCTION
West Mountain LLC (Internal File No. A-03767) (the “West Mountain
accounting firm.
Respondent, through counsel, advised the SEC that, because counsel for
Respondent K&O would not comply absent a court order. The Commission
therefore needs such an order to enforce compliance with its lawful subpoena.
2
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critical fact in the investigation is whether Stevanovich benefited from the possible
documents that show the extent to which Stevanovich has benefited from his work
as an investment adviser.
investment advisers to manage a family of hedge funds, all of which were (and still
are) under his control. 2/02/18 Bradley Decl., ¶14. Stevanovich later expanded his
Situations Master Fund L.P. (“Westford Master Fund”) was formed in 2003. 2 Id.,
1
On July 23, 2017, the Commission issued an Order Directing Private Investigation and
Designating Officers to Take Testimony (the “Formal Order”) pursuant to Section 20(a) of the
Securities Act of 1933 (“Securities Act”), 15 U.S.C. § 77t(a), Section 21(a) of the Securities
Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78u(a), and Section 209(a) of the
Investment Advisers Act of 1940 (“Advisers Act”), 15 U.S.C. § 80b-9(a). 2/02/18 Bradley
Decl., ¶4. Pursuant to Section 19(c) of the Securities Act, 15 U.S.C. § 77s(c), Section 21(b) of
the Exchange Act, 15 U.S.C. § 78u(b), and Section 209(b) of the Advisers Act, 15 U.S.C. § 80b-
9(b), the Formal Order designated certain individuals as officers of the Commission empowered
to administer oaths and affirmations, subpoena witnesses, compel their attendance, take
evidence, and require the production of any books, papers, correspondence, memoranda, or other
records deemed relevant or material to the investigation. Id.
2
The Westford Master Fund has a number of “feeder funds”: Epsilon Global Master Fund LP,
3
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¶17. Two additional funds, Westford Special Situations Fund II LP and Westford
Special Situations Fund II Ltd. were formed in 2009 (the “New Westford Funds,”
and collectively with the Westford Master Fund and its feeders, the “Westford
People have invested in the Westford Funds based on the perceived value
and potential growth in value of those funds. Although we have not been provided
have invested more than $100 million in the Westford Funds. Id., ¶18. According
to what appears to be its last audited financials, the Westford Master Fund had
$273 million of total assets as of December 31, 2007, of which $47 million related
to certain debt investments ($44 million in preferred shares and a $3 million note)
Epsilon Global Active Value Fund LP, Epsilon Global Active Value Fund Ltd., Epsilon Global
Master Fund II LP, Epsilon Global Active Value Fund II-B LP, Epsilon Global Active Value
Fund II Ltd., Westford Special Situations Fund LP, and Westford Special Situations Fund Ltd.
2/02/18 Bradley Decl., ¶16.
3
Stevanovich may control more than a dozen funds and other entities, but the SEC has been
unable to confirm the existence and value of all such entities. Despite repeated requests over the
past three and a half months, none of the three law firms that have represented Stevanovich at
various times in this investigation have been able or willing to provide the SEC with even a list
of names for these funds and entities.
4
The Commission has filed a subpoena enforcement action against GBA principal David Groen
(SEC v. David Groen, Civil Action No. 1:18-mi-00004-RWS-CMS) in this Court, because he
failed to respond to a subpoena calling for production of documents and testimony. David Groen
is represented by counsel for Stevanovich.
4
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N.V. (“PwC”), never completed the next year’s audit (2008), and the Westford
Master Fund does not appear to have had audited financials since 2007, 5 even
though the fund’s governing documents require annual audits. Id., ¶21, Ex. 7.6
Holdings Corp. (“APT”) for equity interests in those companies.7 It appears that,
in or about July 2013, the Westford Master Fund ceased using their fund
5
PwC was not the auditor for the New Westford Funds. To date, it is unclear whether the New
Westford Funds have ever been audited.
6
Through 2009 into 2010, the value of the Westford Master Fund’s assets remained an issue of
contention with PwC. Although PwC had indicated throughout the 2008 audit that there was
insufficient evidence to support certain asset values, including the GBA debt, Westford
Management misleadingly told investors on February 4, 2010 that, “[f]rom the beginning of the
2008 audits, we and PwC have gone to unusual lengths, including independent audits and
valuations of several of these investments by leading independent accountants and valuation
experts, all for the purpose of determining beyond reasonable doubt whether each of these
investments was unimpaired and thus correctly valued.” Id., ¶22, Ex. 8. On February 23, 2010,
PwC wrote Westford Management and objected to the statement in the February 4 investor
update “suggest[ing] that PwC has already concluded on the fair presentation of the valuations of
the respective investments in the 2008 accounts. . . . [U]ntil we have fully concluded our audit
work, we are not in a position to raise any such conclusions.” Id., Ex. 8.
7
As of June 2014, GBA and APT comprised 99% of the Westford Master Fund’s assets, and the
Westford Master Fund owned nearly 29% of GBA and 33% of APT. Id., ¶28. It appears that
Stevanovich-controlled entities, including the Westford Funds, own majority interests in GBA
and APT; however, due to the limited nature of the production from Westford Management, the
SEC has not been able to ascertain the full extent of the ownership interests in these companies
or how and when those ownership interests were acquired.
5
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positions.
the fund, raising the Westford Master Funds’ value by at least 250% to $741
million. 8 As of June 30, 2014, the Westford Master Fund’s unaudited financial
statements indicated that the fund owed Stevanovich and Westford Management
roughly $107 million in adviser fees. Id., ¶29. Westford Management’s adviser
fees are based on the fund’s performance, so higher fund values equate to higher
over $250 million in adviser fees. Id., ¶30. The SEC has not been provided with
8
The Westford Funds’ new – and much higher – asset values were based on the reports prepared
in early 2014 by the Hong Kong office of Jones Lang LaSalle (“JLL”). See 2/02/2018 Bradley
Decl., ¶24, Exs. 11 and 12. These JLL reports estimated that, under certain scenarios, GBA and
APT had a combined value of almost $2.5 billion. See id., Ex. 11 at WAM0000039 and Ex. 12
at WAM000005. The GBA JLL report, which purportedly shows a $1.6 billion value, is based
on assumptions about the future. However, while the report discusses several product lines (id.,
Ex. 11 at WAM0000044-46), none of those product lines existed on the “as of” date of the
report, October 31, 2013. Id., ¶26. Moreover, for the prior year (2012), GBA had total annual
income of $12,000 and an annual net loss of $3.5 million. Id., ¶27. Currently, GBA is doing
business under the name Skyworks Global, Inc.; it has one full-time employee and is involved in
involuntary bankruptcy proceedings in the Bankruptcy Court for the District of Utah (Case No.
17-28510).
6
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December 5, 2017 via UPS. Id., at ¶5, Ex. 1. 10 UPS reported delivery of the
place of business for K&O at the time and was signed for by “Cunningham.” Id.,
at ¶¶8 and 9, Ex. 2. The subpoena required K&O to produce documents to the
Commission’s Atlanta Regional Office on January 12, 2018, but was modified by
On January 25, 2018, through counsel, K&O informed the SEC by email
that it would not produce responsive documents due to a letter it received from the
client’s attorney, Harry Lipman of Rottenberg Lipman Rich P.C., which directed
9
The Formal Order in this matter expressly empowers the Commission staff to investigate
whether Westford Management, or its officers or agents, while acting as an investment adviser,
misappropriated or abused client assets by, among other things, taking fees based on fraudulently
inflated or misvalued assets in the portfolios of the managed funds.
10
Given the confidential nature of Commission formal orders, the Commission has not included
a copy of the Formal Order with this Application. The Commission stands ready to provide a
copy of the Formal Order, but requests that the Court review it in camera.
7
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privilege under Washington law (RCWA §18.04.405), and (2) the supposed
On January 26, 2018, the SEC informed K&O that RCW §18.04.405 does
not apply to subpoenas by an agency of the United States and that there is no
federal accountant-client privilege. Id., at ¶12, Ex. 5. On January 29, 2018, the
SEC further notified K&O that 26 U.S.C. § 7216 does not apply to disclosures of
January 29, 2018, K&O responded and indicated that it would not produce the
III. ARGUMENT
with the subpoena.11 The law is clear that a federal district court must enforce an
11
The Commission is the Congressionally-created agency charged with civil enforcement of the
federal securities laws. The Commission issued the Formal Order pursuant to Section 20(a) of
the Securities Act, 15 U.S.C. § 77t(a), and Section 21(a) of the Exchange Act, 15 U.S.C. §
78u(a), and Section 209(a) of the Advisers Act, 15 U.S.C. § 80b-9(a), and designated officers
authorized to issue subpoenas pursuant to Section 19(c) of the Securities Act, 15 U.S.C. § 77s(c),
and Section 21(b) of the Exchange Act, 15 U.S.C. § 78u(b), and Section 209(b) of the Advisers
8
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agency, the demand is not too indefinite and the information sought is reasonably
relevant.” United States v. Morton Salt Co., 338 U.S. 632, 652 (1950). “It is well-
subpoena is sharply limited; inquiry is appropriate only into whether the evidence
sought is material and relevant to a lawful purpose of the agency.” United States v.
Florida Azalea Specialists, 19 F.3d 620, 623 (11th Cir. 1994), quoting, EEOC v.
Kloster Cruise Ltd., 939 F.2d 920, 922 (11th Cir. 1991).
SEC to demonstrate the following: “‘(1) that the investigation will be conducted
pursuant to a legitimate purpose, (2) that the inquiry may be relevant to the
purpose, (3) that the information sought is not already within the Commissioner’s
possession, and (4) that the administrative steps required … have been followed.’”
SEC v. Huff, 664 F. Supp. 2d 1288, 1294 (S.D. Fla. 2009), quoting, United States
v. Powell, 379 U.S. 48, 57-58 (1964). A respondent seeking to defeat enforcement
9
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In the present matter, the Commission satisfies each of the requirements for
Declaration. See RNR Enters., Inc. v. SEC, 122 F.3d at 97 (“‘An affidavit from a
requirements have been met.’”) (quoting In re McVane, 44 F.3d 1127, 1136 (2d
Cir. 1995)).
persons or entities have violated provisions of the federal securities laws. (For
and the rules thereunder). Thus, the West Mountain Investigation is being
Commission need only show that the information sought is “not plainly
incompetent or irrelevant to any lawful purpose.” SEC v. Arthur Young & Co., 584
F.2d 1018,1029 (D.C. Cir. 1978) (quoting Endicott Johnson Corp. v. Perkins, 317
10
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U.S. 501, 509 (1943)); see also SEC v. Jerry T. O’Brien, Inc., 467 U.S. 735, 741
possible violations of the federal securities laws and to demand the production of
F.2d 1368, 1379 (D.C. Cir. 1980) (en banc) (Congress authorized the Commission
“in its discretion, [to] make such investigations as it deems necessary” into
Stevanovich, his household, and any entities under his control, including, but not
limited to, any client files, financial statements, and filings, as well as documents
received from any of the aforementioned persons. It also calls for the production
communications are necessary for the staff to ascertain, among other things, the
of investor funds, the propriety of transactions between entities under his control
and the funds he manages (or has managed), and the location of assets held
Third, to the knowledge of the Commission staff, the Commission does not
11
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possess the information sought in the subpoena. 2/02/18 Bradley Decl., ¶32.
¶¶4(ii) and 5; see also Exchange Act Section 21(b), 15 U.S.C. § 78u(b)
served the subpoena. 2/02/18 Bradley Decl., ¶¶5, 8, and 9; see also 17 C.F.R. §§
an agency of this state, the board, or of the United States to subpoena and use such
instance.12
12
There is no federally recognized accountant-client privilege, and state confidentiality laws
12
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here. Although 26 U.S.C. § 7216(a) does generally prohibit the disclosure of tax
records by tax preparers, that section does not apply to disclosures permitted by
“[t]he provisions of section 7216(a) and § 301.7216-1 will not apply to any
disclosure of tax return information if the disclosure is made pursuant to any of the
subpoena that is issued in the performance of its duties by—(i) Any Federal agency
2(f).14
IV. CONCLUSION
For the foregoing reasons, the Commission respectfully requests that the
must yield where federal law requires disclosure. SEC v. Fuhlendorf, No. 10-01691, 2010 U.S.
Dist. LEXIS 98600, at *5-*7 (D. Colo. Sept. 7, 2010), citing 1 Am. Jur. 2d Accountants § 11
(2010) (noting that because no accountant-client privilege exists in federal law, “[a] client's
disclosure of documents directly to an auditor, accountant, or tax analyst destroys confidentiality
. . . [and a]ll information contained in an accountant’s workpapers that pertains to financial
affairs of the accountant’s client is a proper subject for discovery”); see also In re Grand Jury
Proceedings, 607 F. Supp. 2d 803, 807 (W.D. Tex. 2009) (recognizing that state confidentiality
laws are preempted by federal subpoena authority).
13
The statute also permits disclosure pursuant to a court order. See 26 U.S.C. § 7216(b)(1)(B).
14
“Agency” includes “any independent regulatory agency.” See 5 U.S.C. § 552(f). The term
“independent regulatory agency” expressly includes the “Securities and Exchange Commission.”
See 44 U.S.C. § 3502(5).
13
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Court order Respondent K&O to show cause why it should not comply with the
Respectfully Submitted,
14