Articles Posted in Hedge Funds

Ex-Hedge Fund Portfolio Managers Convicted in $72M Insider Trading Scams

Published on: January 1, 2013 | by Shepherd Smith Edwards & Kantas, LLP

A jury has convicted Anthony Chiasson and Todd Newman, two ex-hedge fund portfolio managers, of securities fraud and conspiracy charges related to the parts they played in insider trading scams that caused them to illegally profit about $72M. Newman was previously with Diamondback Capital Management, LLC while Chiasson was with Level Global Investors, LP.

According to United States Attorney for the Southern District of New York Preet Bharara, the defendants made trades using insider information about NVIDIA Corporation (NVDA) and Dell Inc. (DELL). Research analysts at different investment firms gave them the material, nonpublic information.

Chiasson was found guilty of five counts of securities fraud. On just the two technology companies’ stocks, he had made Level Global $68.5 million. Newman, who made his fund approximately $3.8 million, was convicted of four securities fraud counts. Both men could spend years behind bars.

The massive insider trading operation ran from 2007 to 2009. Level Global, a $4 billion hedge fund, underwent liquidation 2011 following a 2010 FBI raid. Diamondback told its clients in December that it too was shutting down shop following similar raids.

Meantime, the research analysts accused of giving Chiasson and Newman the information have also pled guilty to related criminal charges: Jon Horvath, previously with Sigma Capital Management; Jesse Tortora, also previously with Diamondback and who had worked under Newman; Danny Kuo, formerly with Trust Company; Sandeep Goyal, formerly with Neuberger Berman; Spyridon Adondakis, who had worked at under Chiasson at Level Global. Tortora, Goyal and Adondakis were cooperating witnesses that testified in this latest criminal trial.

Operation Perfect Hedge
The investigation and prosecution of these men are part of Operation Perfect Hedge, which is the name given to the FBI’s systematic efforts to target insider trading involving hedge funds. Since October 2009, Bharara’s office has charged 79 people with insider trading-71 of them have either been convicted or they entered guilty pleas.

More Blog Posts:
$78M Insider Trading Scam: “Operation Perfect Hedge” Leads to Criminal Charges for Seven Financial Industry Professionals, Stockbroker Fraud Blog, January 18, 2012
Texas Securities Fraud: SEC Charges Life Partners Holdings Inc. in Life Settlement Scam, Stockbroker Fraud Blog, January 4, 2012 Continue Reading ›

Some Private Fund Advisers are Exercising Inadequate Controls, Says SEC Commissioner Elisse Walter

Published on: December 15, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to Securities and Exchange Commissioner Elise Walter, examinations of newly registered private fund advisers has already revealed numerous instances of poor controls by a number of members, especially when expenses and fees are involved. Some of these instances, she reports, are on the border of misconduct. Walter, who President Obama named to take the place of current SEC Chairman Schapiro when she steps down this week, expressed her own views (which may not be the same as the regulator’s) at the Commission’s enforcement panel at the National Law Journal’s Regulatory Summit in DC earlier this month.

Over 1,500 advisers to hedge funds and private funds are now also SEC registered in the wake of rules adopted per the Dodd-Frank Wall Street Reform and Consumer Protection Act. This raises the total number of those that have completed Commission registration to 4,061 private fund advisers and 11,002 investment advisers, with 37% offering advise to hedge funds and other private funds.

The Commission’s Office of Compliance Inspections and Examinations will perform adviser “presence” exams looking at certain risk areas for the next two years. This is a new process for advisers, which is why the SEC has been engaged in outreach to make sure expectations and procedures are clear.

Insider Trading Headlines: Hedge Fund Manager Named in “Most Lucrative Tip” Ever, Ex-Real Estate Director & Friend Accused of Sharing Tips in Merger Targets Must Face SEC Charges, & Matter of Criminal Liability of Secondary Tippees is Clarified Again

Published on: December 13, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Hedge Fund Manager Named in “Most Lucrative Tip” Ever
Prosecutors have unsealed a criminal complaint in what is being called an insider trading scam that lacks historical precedent involving the “most lucrative inside tip of all time.” Ex-hedge fund manager Mathew Martoma allegedly made or avoided losses of $276M when trading securities in pharmaceutical companies Wyeth and Elan Corp. plc.

The insider information related to the potential ineffectiveness of an Alzheimer drug clinical that both companies were working on, which consultant Sidney Gilman allegedly provided to Martoma, is purportedly the reason that the former hedge fund manager liquidated his funds’ long position (about $700M) in the two companies and took short positions instead. Martoma, advisory firm CR Intrinsic Investors LLC, and an affiliated adviser allegedly avoided $194M in losses and $82M in profits when the drug trial results were made public and the companies’ stock dropped. The SEC has filed a parallel civil case against Martoma, CR Intrinsic Investors, and Gilman.

Ex-Real Estate Director & Tippee Friend in Merger Targets Must Face SEC Charges
Ex-Royal Philips real estate director Ralph J. Pirtle Ralph J. Pirtle and his friend Berco Realty President Morando Berrettini do, indeed, have to face Securities and Exchange Commission insider trading charges. The SEC had filed charges against them in 2008 because Pirtle allegedly provided Berrettini with insider information that came from the due diligence he was conducting for Royal Philips about possible merger targets. Berrettini then allegedly used the tips to trade in the stocks of three of the companies under consideration and he made “substantial profit” when two of them were acquired.

The defendants’ countered that in filing its case the SEC did not provide evidence that would cause a jury to find that Berrettini benefited from the insider information. However, Judge Robert M. Dow Jr. of the U.S. District Court for the Northern District of Illinois says that the SEC did adequately allege its claims elements and the insider trading charges will stand.

Criminal Liability of Secondary Tippees Gets Court Clarification Again
When is a secondary tippee criminally liable for insider trading? Holding the conclusion made earlier this year by Federal Judge Jed Rakoff, the U.S. District Court for the Southern District of New York said that it is when that tippee had a “general understanding” that the information received came from an insider who breached a confidentiality duty for personal benefit.

The court rulings involved jury instructions in the criminal case against hedge fund manager Doug Whitman, who was convicted on securities fraud and conspiracy charges related to tips he received from tippees that got their information from the employees of three public companies. The court found that in addition to having this “general understanding,” a secondary tippee such as Whitman does not have to know the specifics of the breach or the benefits that the insider obtained to be held criminally liable. He/she, however, must have had a “specific intent” to defraud the company that the information is related to of that data’s confidentiality.

SEC Charges Former Corporate Director of Real Estate and Real Estate Broker For Insider Trading, SEC, April 1, 2010

More Blog Posts:
Texas Securities Case: Mark Cuban Asks District Court To Reconsider Compelling the SEC to Produce Documents Related to Insider Trading Allegations Over Mamma.com Stock Offering, Stockbroker Fraud Blog, June 19, 2012

Insider Trading Roundup: SEC Settlement Reached Over Alleged Tips In Insurers’ Merger, Court Won’t Throw Out Criminal Charges Related to Info From AA Member, & Asset Freeze Approved Against Broker In Burger King Acquisition, Stockbroker Fraud Blog, September 28, 2012

SEC Roundup: $62M Securities Fraud Award Against Ex-Lancer Group Hedge Fund Manager Stands, Investment Management Division Adopts Risk-Based Approach to Regulatory Initiatives, & Conflicts of Interest Areas Now Are Priority

Published on: November 10, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The US Supreme Court has decided not to review a ruling by the U.S. Court of Appeals for the Eleventh Circuit affirming a $62M award against Michael Lauer, an ex-Lancer Group Hedge Fund manager, in the securities lawsuit filed against him by the Securities and Exchange Commission. The federal appeals court had said that the district court’s decision granting the Commission’s motion for summary judgment on liability and remedies was proper.

Per the SEC fraud lawsuit, Lauer is accused of misrepresenting the hedge funds’ true value by artificially inflating the value of holdings found in shell companies that were thinly traded. The Commission contends that he hid his scam by making false statements in investor newsletters, private placement memoranda, and phone calls. (Lauer has since been acquitted of related criminal charges.)

In his certiorari petition filed earlier, Lauer argued that federal court couldn’t strike a defendant’s motion to dismiss due to lack of subject matter jurisdiction without evaluating whether it had such jurisdiction. He also claimed that the appeal’s court ruling that the district court’s decision was grounded in enough evidence was not de novo review.

Louisiana-Based Hedge Fund Manager Charged by SEC with Securities Fraud Related for Allegedly Concealing RMBS Losses

Published on: November 8, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has filed charges against hedge fund manager Walter A. Morales and his Baton Rouge-based firm Commonwealth Advisors with allegedly defrauding investors by concealing the millions of dollars in losses sustained from investments linked to residential mortgage-backed securities during the economic crisis. The SEC wants a jury trial and it is seeking permanent enjoinment, penalties, disgorgement, and prejudgment interest.

According to the Commission’s RMBS lawsuit, Morales and his financial firm caused the hedge funds that they oversaw to purchase Collybus, which were the most risky and lowest tranches of a collateralized debt obligation. They then sold MBS into the CDO at prices they had received four months prior while being fully aware that during this time the RMBS market had declined. As the CDO investments continued to not do well, Morales allegedly told firm employees to engage in cross-trades by conducting manipulative trades with the hedge funds they advised so that a $32 million loss sustained by one of the funds in the Collybus investment could be hidden. Morales and his firm then allegedly lied to investors, which included individuals and pension funds, about the worth and quantity of the mortgage-backed assets in the funds and created bogus internal documents so that their false valuations could be justified.

Also, even though Morales and Commonwealth likely knew that the losses would continue for some time, the SEC contends that the two of them conducted over 150 cross-trades between two hedge funds they provided advice to and another one of their hedge funds at prices under Commonwealth’s valuation for those securities in June 2008. After the trades were made, Morales is said to have instructed an employee to designate the securities as having fair market value, creating a $19 million gain for the acquiring hedge fund that was fraudulent and at cost to the funds that were sold. The cross-trades were conducted even though Morales had represented that it would not make such trades.

The SEC also claims Morales deceived a prime brokers by representing the transactions as legitimate and at current market prices, as well as its largest investor by misrepresenting the latter’s exposure to the CDO. Although he had promised that the investor’s exposure to Collybus would be limited, by the middle of 2008 its exposure was almost double. Morales also allegedly made up false minutes after the investor found out that Commonwealth was not going along with its valuation procedures that it had stated.

SEC Charges Baton Rouge-Based Investment Adviser with Hiding Losses From Mortgage-Backed Securities Investments, SEC, November 8, 2012

Read the SEC Complaint (PDF)

More Blog Posts:
Wells Fargo Securities Settles for Over $6.5M SEC Charges Over Allegedly Improper Sale of ABCP Investments with Risky MBS and CDOs, Institutional Investor Securities Blog, August 14, 2012

Harbinger Capital Partners LLC and Hedge Fund Adviser Philip A. Falcone Face SEC Securities Charges Over Client Asset Misappropriation and Market Manipulation Allegations, Institutional Investor Securities Blog, June 29, 2012

Securities Lawsuit Against Options Clearing Corporation and Chicago Board Options Exchange Can Proceed Says Illinois Appellate Court, Stockbroker Fraud Blog, August 24, 2012 Continue Reading ›

Institutional Investment Fraud Roundup: Ex-Analyst Guilty in $61.8M Insider Trading Scheme, SLUSA Precludes Investor Class Action Over Hedge Funds that Failed After Madoff Ponzi, & Dark Pool Operator Settles Subscriber Info. Breach Charges

Published on: October 18, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Jon Horvath, an ex-research analyst at a New York hedge fund, has pled guilty to two counts of securities fraud and one count of conspiracy to commit securities fraud related to a $61.8 million insider trading scheme. Several other former hedge fund managers and analysts from different investment firms and hedge funds are also accused of allegedly trading key, nonpublic information about NVIDIA Corporation (NVDA), Dell, Inc. (Dell), and other publicly traded technology companies between 2007 and 2009. The information was obtained indirectly and directly from employees that worked at these companies.

Horvath admitted that when he received the insider information from the other analysts, he knew that they were all breaching their duties of loyalty. He caused certain trades to be executed based on such information. He also provided the other analysts with insider information about publicly traded companies.

In other securities fraud news, the U.S. District Court for the Southern District of New York has ruled that under California securities law, the Securities Litigation Uniform Standards Act bars a class action filed by investors in two hedge funds that failed after the Madoff Ponzi scheme was found out. The plaintiffs are contending that the defendants, investment advisor Tremont Partners and a number of affiliates, made misrepresentations and omissions connected with a covered securities’ sale. The case is Lakeview Investment LP v. Schulman.

Institutional Investment Fraud Roundup: Ex-Hedge Fund Managers’ Guilty Plea Over Bilking Investors of Almost $1M Get 3-Year Prison Term, SEC Sues Investment Adviser Over Alleged $37M Ponzi, and SEC Files Lawsuit Over Purported “Fund of Funds” Scam

Published on: September 26, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Ex-hedge fund managers Christopher Fardella and Michael Katz have been sentenced to three years in prison after they pleaded securities fraud and conspiracy charges for defrauding investors of nearly $1 million. Per court documents, between April 2005 and November 2006, the two men, along with two co-conspirators, were partners in KMFG International LLC, which is a hedge fund.

They cold called investors throughout the US and provided them with misleading information about the fund, its principals, and financial performance even though KMFG actually lacked a track record and never generated any profit for investors. The defendants and co-conspirators lost and spent $981,000 of the $1,031,086 that was given to them by investors.

Meantime, another hedge fund manager, Oregon-based investment advisor Yusaf Jawad, is being sued by the Securities and Exchange Commission over an alleged $37 million Ponzi scam. The securities lawsuit against him and attorney Robert Custis was filed in the U.S. District Court for the District of Oregon.

Securities Lawsuit Against Options Clearing Corporation and Chicago Board Options Exchange Can Proceed Says Illinois Appellate Court

Published on: August 24, 2012 | by Shepherd Smith Edwards & Kantas, LLP

In a divided 2-1 ruling, the Illinois Appellate Court has decided that Platinum Partners Value Arbitrage Fund LP can sue the Chicago Board Options Exchange and the Options Clearing Corporation for allegedly telling certain traders about a downward adjustment made to the price of certain mutual fund options. The ruling reverses a lawyer court’s decision and concludes that the two SROs did not act in a regulatory capacity when they privately revealed this information to certain John Doe defendants before the news was made public.

Platinum Partners Value Arbitrage Fund, which is a hedge fund, contends that in late 2010, it bought 50,000 India Fund Inc. (IFN) options from the John Does. Soon after, Options Clearing Corporation and Chicago Board Options Exchange decided to downgrade the India Fund’s series option contracts strike price by $3.78. An employee at one of the SRO’s allegedly told certain market participants about this adjustment before the public was notified.

The hedge fund then proceeded to file a securities fraud lawsuit against Chicago Board Options Exchange and Options Clearing Corp. accusing them of Illinois statutory and common law violations, while contending that they caused it to suffer harm because it bought the IFN options right before the price adjustment was publicly disclosed. The two organizations countered that as SROs, they were immune from such lawsuits. The lower court agreed with their claim of immunity.

The appellate court, however, disagrees. In his majority opinion, Circuit Judge Robert E. Gordon stressed that SROs are not completely immune from lawsuits and that absolute immunity only stands when the alleged conduct in question is one that is a disciplinary, regulatory, or quasi-governmental prosecutorial function. The court noted that while the plaintiff acknowledged that the decision to change IFN’s strike price was a regulatory one, how the change was disclosed-early and in in private to the John Doe defendants-wasn’t and didn’t serve a purpose that was governmental or regulatory. Seeing as SROs, in addition to fulfilling quasi-governmental duties also have a for-profit business that is private, the court found that when the private disclosure was made to the John Doe defendants, Chicago Board Options Exchange and Options Clearing Corp. were behaving in a “private capacity and for their own corporate benefit.” As a result, the non-public notification to the John Doe defendants cannot be considered conduct under the 1934 Securities Exchange Act’s delegated authority and therefore “cannot be protected by the doctrine of regulatory immunity.”

Judge Gordon also determined that Platinum Partners did a sufficient job of stating a claim, under the Illinois Consumer Fraud Act, that disclosing the price adjustment in private was a “material omission and a deceptive act” by the two SROs. The hedge fund claimed that the two organizations meant for the rest of the market to depend on the fact that the information hadn’t been already privately disclosed to anyone. The judge said that the deception occurred during commerce and trade and was the proximate cause of damage to the plaintiff.

Platinum Partners Value Arbitrage Fund LP v. Chicago Board Options Exchange, Ill. App (PDF)

Chicago Board Options Exchange

More Blog Posts:
Goldman Sachs Ordered by FINRA to Pay $650K Fine For Not Disclosing that Broker Responsible for CDO ABACUS 2007-ACI Was Target of SEC Investigation, Stockbroker Fraud Blog, November 12, 2010
Harbinger Capital Partners LLC and Hedge Fund Adviser Philip A. Falcone Face SEC Securities Charges Over Client Asset Misappropriation and Market Manipulation Allegations, Institutional Investor Securities Blog, June 29, 2012

Montford Associates to Pay $650,000 in Securities and Exchange Commission Penalties Over Failure to Disclose Payments from Hedge Fund, Institutional Investor Securities Blog, May 1, 2008 Continue Reading ›

Institutional Investment Fraud Roundup: STEC Inc. CEO Sued for Insider Trading, Hedge Fund Adviser Indicted for Allegedly Misleading Investors, Two Brothers Settle Naked Short Selling Lawsuit for $14.5M, & Underwriters Get New Disclosure Obligations

Published on: July 28, 2012 | by Shepherd Smith Edwards & Kantas, LLP

In SEC v. Moshayedi, the Securities and Commission is suing the Chairman and CEO of computer device storage company STEC Inc. (STEC) for insider trading. Manouchehr Moshayedi allegedly traded in his company stock’s secondary offering because he had insider knowledge that there was a decline in the demand for an important product.

The SEC contends that Moshayedi was attempting avail of a sharp upward trend in the price of the company stock when he sold a significant amount of his shares, as well as shares belonging to his brother, who had co-founded the company with him. As a result of his actions, the Commission says that the siblings made gross proceeds of approximately $134 million each. Moshayedi has denied the allegations and intends to combat the case.

In another SEC case, two other brothers that were sued by the Commission for their alleged involvement in naked short selling have agreed to settle the administrative case against them by paying $14.5 million. Robert A. Wolfson and Jeffrey Wolfson are accused of not locating and delivering shares in short sales to brokerage firms. These naked-short selling transactions allegedly earned them about $9.5 million in illegal profits.

Golden Anchor Trading II LLC was also sued over this matter and has settled as well. While the Wolfsons are paying $13.4 million, the brokerage firm has agreed to pay $1.1 million. By settling, none of them are admitting to or denying the allegations.

Meantime, hedge fund adviser Chetan Kapur, who last year settled SEC administrative and civil charges over alleged misconduct related to allegations that he misled investors, has been indicted on the charges of investment adviser fraud, securities fraud, and wire fraud. Kapur was ThinkStrategy Capital Management LLC’s sole managing principal. The financial firm managed the hedge funds ThinkStrategy Capital Management LLC and ThinkStrategy Capital Fund.

According to the criminal charges, made in the U.S. District Court for the Southern District of New York, Kapur allegedly misled clients about the financial state of the two funds through material misstatements and omissions. He also is accused of giving false information about the funds’ performance, assets, longevity, due diligence, and personnel. If convicted, he faces up to 125 years in prison.

In other securities news, beginning August 2, underwriters will have to fulfill new disclosure obligations to local and state governments. This includes disclosing any actual or possible material conflicts of interest, any third party compensation, and any risks involving complex financial transactions that are recommended to clients. Earlier this month the Municipal Securities Rulemaking Board published guidance to assist underwriters in fulfilling these new duties.

SEC v. Moshayedi (PDF)

Short Selling Brothers Agree to Pay $14.5 Million to Settle SEC Charges, SEC, July 17, 2012

SEC v. Kapur (PDF)

MSRB Rule G-17 (PDF)

More Blog Posts:
No SIPA Coverage for Soft Dollar Credits, Says Bankruptcy Court, Institutional Investor Securities Blog, July 21, 2012

SEC’s Delay in Adopting Conflict Minerals Disclosure Rule is Impeding the Development of Initiatives for Issuer Compliance, Says GAO, Stockbroker Fraud Blog, July 27, 2012

Peregrine Financial Group Customers Were Victims of the “System,” Says CFTC Chairman Gensler, Institutional Investor Securities Blog, July 26, 2012

Harbinger Capital Partners LLC and Hedge Fund Adviser Philip A. Falcone Face SEC Securities Charges Over Client Asset Misappropriation and Market Manipulation Allegations

Published on: June 29, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The SEC has filed securities charges against Harbinger Capital Partners LLC and its owner Philip A. Falcone. The SEC is accusing them of a number of charges, including engaging in market manipulation and client asset misappropriation. Also facing SEC charges for allegedly helping them is former Harbinger COO Peter A. Jenson.

The Commission accused Falcone, who is a hedge fund adviser headquartered in New York, of paying his taxes with fund assets, getting involved in a “short squeeze” that was not legal to manipulate the prices of bonds, and secretly favoring some clients to the disadvantage of other clients. The SEC contended that after short selling equity securities during a period that was restricted, Harbinger then illegally purchased the same ones in a public offering.

The Commission claims that rather than use legal means to cover the $113.2M in personal taxes that he owed, Falcone fraudulently used fund assets by borrowing that amount from Harbinger Capital Partners Special Situations Fund, L.P. (investors had been suspended from redeeming from this fund). The regulator says that all of this was done without investors’ permission.

The Commission also contends that Harbinger and Falcone waited about five months to reveal the loan because they were worried that making the hedge fund adviser’s financial state known could negatively impact both investors’ withdrawals and Falcone’s ability to bring in more investments for the other Harbinger funds.

The SEC is accusing Harbinger and Falcone, with Jenson’s help, of making a number of key omissions and misrepresentations in getting legal counsel and when communicating with investors about: the financing options that had been available to Falcone, the reasons why he needed the loan, the fund’s ability to not harm investors while covering the loan, the loan’s conditions and terms, and the part that Harbinger’s legal counsel played. Falcone paid back the loan last year after the SEC started investigating this matter. In connection with this alleged scam, the SEC separately filed and settled cease-and-desist and administrative proceedings against Harbinger.

The Commission also filed another civil case contending that between ‘06 through early ‘08, two Harbinger entities and Falcone engaged in market manipulation of distressed high-yield bonds issued by MAXX Holdings Inc. The three of them allegedly took part in a “short squeeze” that was not legal and, on Falcone’s order, Harbinger bought a huge position in the bonds in 4/06 and 6/06.

When he heard rumors that a financial services firm was shorting the bonds and suggesting that its clients follow suit, Falcone allegedly decided to retaliate by telling the funds that were managed by Harbinger to purchase every bond that was available, which caused the funds’ stakes to go up about 13% more than what was actually available.

The financial services company and its clients were then told that they had to settle their MAAX short sales that were outstanding, which was not really possible given the circumstances. As the financial services company went on to bid for the bonds every day, the bond price doubled. Falcone is accused of then taking part in transactions, at prices that were both inflated and arbitrary, with a number of short sellers.

SEC Complaint: Harbinger Capital Partners LLC; Philip A. Falcone; and Peter A. Jenson (PDF)

SEC Complaint: Philip A. Falcone, Harbinger Capital Partners Offshore Manager, L.L.C., and Harbinger Capital Partners Special Situations GP, L.L.C. (PDF)

More Blog Posts:
Hedge Fund Manager Raj Rajaratnam Ordered by SEC to Pay $92.8M Penalty for Insider Trading, Stockbroker Fraud, November 12, 2011

Accused Texas Ponzi Scammer May Have Defrauded Investors of $2M, Stockbroker Fraud, August 3, 2011

Montford Associates to Pay $650,000 in Securities and Exchange Commission Penalties Over Failure to Disclose Payments from Hedge Fund, Institutional Investor Securities Blog, May 1, 2012