SAN FRANCISCO, CA (White and Case) – As a follow up to an administrative proceeding two weeks ago against an investment adviser for inflating its assets under management to third party rankingservices, the U.S. Securities and Exchange Commission (the “SEC”) has filed a complaint in a United States District Court in Georgia against another investment adviser for failing to disclose thatcertain historical returns were based on hypothetical models, and not actual results.

The SEC complaint alleges that from at least November 2002 to September 2004, Market-Timing Technologies, LLC and its president (collectively, “Market-Timing”) actively solicited investment advisory clients through internet websites that advertised eight different asset management programs. The programs used models that, based on short-term market trends, identified when Market-Timing should shift clients’ investments among various mutual funds within a fund family. The SEC complaint alleges that although the websites represented that the models produced historical average annual returns between 9% and 91.4%, the websites failed to disclose that these return rates were based primarily on hypothetical investments, rather than actual results.

The SEC complaint also threw in the standard allegation that the SEC uses against investment advisers that are alleged to have violated other provisions of the Investment Advisers Act of 1940 (“Advisers Act”), i.e., that Market-Timing failed to maintain the books and records required by the Advisers Act. The books and records claim is a bit more interesting in this case, as the SEC complaint alleges that during a recent SEC staff examination of Market Timing, this adviser declined to produce documentation substantiating the accuracy of the performance representations in the websites.

At the very least, you would have thought that Market Timing would have changed it�s name, given the embarrassment the SEC has suffered recently at the hands of market timers. But for hedge fund advisers, there is another lesson here. It is not uncommon for hedge fund managers to use hypothetical or �back tested� results in one on one marketing materials to potential clients. Just because this information is delivered in a one on one context to �sophisticated investors� and not distributed over the internet to an unsuspecting public, does not relieve hedge fund managers from disclosing all material information to potential investors. The fact that the results shown in a Powerpoint presentation are hypothetical and not actual results would, in nearly all cases, considered to be material and required to be disclosed to potential investors.

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