Enforcement News: SEC Charges Investment Adviser and His Firm with Violating Prior Settlement, Causing $1.6 million in Damages to Fund

• Posted on: Mar 24 2025

By: Jeffrey M. Haber

An investment company is a company that issues securities and primarily invests in securities. Among the securities laws applicable to investment companies, is the Investment Company Act (“ICA”).

Congress enacted the ICA to provide for the registration and regulation of investment companies to protect investors from purchasing securities without the benefit of certain information about the securities, the investment company, and its management.[1]

An investment company registered with the Commission pursuant to the ICA is known as a registered investment company.

A mutual fund is a type of registered investment company that pools money from many investors and invests the money in some combination of stocks, bonds, short-term money-market instruments, and/or other assets. The securities and other assets owned by a mutual fund are known collectively as its portfolio.

A mutual fund’s portfolio is managed by a Commission-registered investment adviser. A mutual fund’s investment adviser owes a fiduciary duty to its client, the fund. This duty includes an affirmative duty of utmost good faith and a duty to act in the best interest of its client, as well as an obligation to provide full and fair disclosure of all material facts and to employ reasonable care.

Each mutual fund share represents an investor’s proportionate ownership of the mutual fund’s portfolio and of the income and capital gains the portfolio generates. Investors in a mutual fund are also referred to as shareholders.

Under the ICA, mutual funds must disclose to the investing public information about itself and its objectives.

The ICA requires that a mutual fund file with the Commission a registration statement containing information that the Commission “prescribe[s] as necessary or appropriate in the public interest or for the protection of investors.”[2] Such information includes a recital of the mutual fund’s policies, including “a recital of all investment policies of the registrant … which are changeable only if authorized by shareholder vote” and “a recital of all policies of the registrant … in respect of matters which the registrant deems matters of fundamental policy.”[3]

Pursuant to Section 5(b) of the ICA, a registered investment company that classifies itself as a management company under Section 4(3) of the ICA, must disclose whether it is a “diversified company” or “non-diversified company.” A “diversified company” must comply with certain specific requirements, including for example that it must maintain 75% of its total assets in cash, Government securities, securities of other investment companies, and securities of other issuers limited in respect to any one issuer to an amount no greater in value than 5% of the value of the total assets of the management company, and not more than 10% of the outstanding voting shares of the issuer.

Pursuant to Section 13(a)(c) of the ICA, no mutual fund shall, “unless authorized by the vote of a majority of its outstanding voting securities … deviate from its policy in respect of concentration of investments in any particular industry or group of industries as recited in its registration statement, deviate from any investment policy which is changeable only if authorized by shareholder vote, or deviate from any policy recited in its registration statement” that it deems, under Section 8(b)(3) of the ICA,[4] “matters of fundamental policy.”[5]

Registered investment companies are governed by a board of directors, who are also referred to as trustees when the registered investment company is organized as a trust.

As in any company, independent directors play a critical role in overseeing a fund’s operations and protecting the interests of a fund’s investors. For this reason, the ICA requires that a mutual fund have a board of directors with no more than 60% of the board being “interested persons” of the fund.[6]

In relevant part, Section 2(a)(19)(A)(i) of the ICA, defines an “interested person” as an affiliated person of the registered investment company, which, under Investment Company Act Section 2(a)(3) [15 U.S.C. § 80a-2(a)(3)], includes any person directly or indirectly owning, controlling, or holding with power to vote, 5% or more of the outstanding voting securities.[7]

On March 17, 2025, the Securities and Exchange Commission announced (here) that it filed charges (here) against an investment adviser and his investment advisory firm, Upright Financial Corp. (“UFC”), for, among other things, allegedly investing more than 25 percent of the Upright Growth Fund’s (”Fund”) assets in a single company over multiple years, causing losses of $1.6 million.[8] We examine the SEC’s allegations below.

SEC v. Chiueh and Upright Financial Corp.

In the 1990s, defendant founded both UFC, an investment adviser registered with the Commission, and Upright Investments Trust (“Upright Trust”), a registered investment company of which the Fund is a series. Beginning at its inception in 1998, and for more than two decades later, the Fund had a disclosed fundamental policy that it would not invest more than 25% of its total assets in one industry (“Concentration Policy”).

In November 2021, the Commission issued a settled order that found that defendants violated the Concentration Policy between July 2017 and June 2020 by concentrating more than 25% of the Fund’s total assets in one industry, including the semiconductor industry (the “2021 Order”). In doing so, the SEC claimed that defendants committed fraud and breached their fiduciary duties to the Fund (among other securities law violations).[9]

According to the SEC, despite defendants’ commitment under the settlement to take and adopt corrective measures to cease the conduct that formed the basis of the 2021 Order, defendants allegedly continued their misconduct unabated. From at least November 24, 2021, through September 29, 2023, defendants allegedly continued to invest more than 25% of the Fund’s total assets in a single company. After September 29, 2023, said the SEC, defendants continued to violate the Fund’s Concentration Policy by investing more than 25% of the Fund’s assets in the semiconductor industry through at least June 23, 2024.

The SEC alleged that defendants’ conduct harmed the Fund and its investors. According to the SEC, by waiting nearly two years to reduce the Fund’s holdings below the 25% limit and then continuing to over concentrate the Fund in the semiconductor industry, defendants allegedly caused losses of approximately $1.6 million. The SEC alleged that defendants collected advisory fees of approximately $100,000 on the Fund’s assets that exceeded the 25% limit.

In addition to the alleged violation of the Concentration Policy, the SEC alleged that defendants engaged in other instances of misconduct with respect to the Upright Trust’s board of trustees (“Board”), in violation of the ICA. First, defendant allegedly operated the Board without the required number of independent trustees and then allegedly misrepresented in the Fund’s filings with the SEC that one trustee was independent when that trustee was not. Second, defendants allegedly failed to provide or withheld key information from the Board, including (i) information reasonably necessary for the Board to evaluate the terms of Upright’s advisory contract, which was not put to a vote as required and which defendant allegedly misrepresented in the Fund’s filings with the SEC, and (ii) allegedly misleading the Board about defendants’ past securities law violations and the 2021 Order. Third, defendants allegedly hired an accountant to audit each series of the Upright Trust, including the Fund, without the required Board vote.

Commenting on the filing, Corey Schuster, Chief of the Division of Enforcement’s Asset Management Unit, stated: “As alleged, the defendants not only ran the fund contrary to its fundamental investment policies, but they actively misled investors and the fund’s board about their conduct. Undeterred by their prior SEC settlement involving these very same issues, we allege that the defendants repeatedly violated fundamental rules designed to protect investors in mutual funds.”

The SEC’s complaint (here), filed in the United States District Court for the District of New Jersey, charges defendants with violating antifraud and other provisions of the federal securities laws, including provisions of the ICA and the Investment Advisers Act. The SEC seeks permanent injunctive relief, return of allegedly ill-gotten gains, and civil penalties. __________________________

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

[1] See Investment Company Act Section 1(b) [15 U.S.C. § 80a-1(b)].

[2] ICA Section 8(a) [15 U.S.C. § 80a-8(a)].

[3] ICA Sections 8(b)(2) and (b)(3) [15 U.S.C. §§ 80a-8(b)(2) and 80a-8(b)(3)].

[4] ICA Section 8(b)(3) [15 U.S.C. § 80a-8(b)(3)].

[5] ICA Section 13(a)(3) [15 U.S.C. § 80a-13(a)(3)]. Section 8(b)(1) of the ICA requires that a registered investment company file a registration statement with the Commission that includes a recital of the company’s policies, including, among other things, whether it is a diversified or non-diversified fund and to the extent it engages in concentrating investments in a particular industry or group of industries. See ICA Section 8(b)(1) [15 U.S.C. § 80a-8(b)(1)].

[6] ICA Section 10(a) [15 U.S.C. § 80a-10(a)].

[7] ICA Section 2(a)(19)(A)(i) [15 U.S.C. § 80a-2(a)(19)(A)(i)].

[8] The Fund is a series of Upright Trust that operates as an open-end, management investment company, otherwise known as a mutual fund. The Fund is and was, listed on NASDAQ under the ticker symbol UPUPX. The Fund’s shares were continuously offered and sold to investors, primarily retail investors. As of December 31, 2024, the Fund held net assets of approximately $22.9 million.

[9] See Upright Financial Corp. and David Yow Shang Chiueh, A.P. File No. 3-20664 (Nov. 24, 2021) (here).