Hedge Funds

Order to Freeze Assets in $53M Fund Fraud Allegedly Involving Michael Kenwood Asset Management LLC Obtained by SEC

Published on: February 21, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The SEC has obtained an order to freeze the assets of investment adviser Michael Kenwood Capital Management LLC and firm principal Francisco Illarramendi, who is accused of taking at least $53M from a hedge fund and fraudulently transferring investor money from several funds to bank accounts he controlled. Illarramendi then allegedly took that money and placed it in private-equity investments.

The SEC’s securities fraud complaint charges the investment adviser and Illarramendi with violating the 1940 Investment Advisers Act. Rather than using the money to benefit investors, Illarramendi allegedly used the money to his benefit and for the benefit of the entities under his control. The SEC says that it sought emergency relief because it was afraid that Illarramendi was going to make additional, unauthorized investments.

The largest private equity investment Illarramendi made was in an unnamed West Coast nuclear energy company. The SEC says he used $23 million in investor funds. A foreign company pension fund that was his biggest investor contributed 90% of the money in his funds.

In December 2009, Illarramendi allegedly authorized for $3.5 million to be transferred from an account to a Spanish company that makes rolled steel. In May 2010, he approved the transfer of $20 million from the financial firm’s $540 million Short Term Liquidity Fund to pay for shares in a clean-tech manufacturing company. He transferred another $4 million from the short-term fund to purchase shares in a development stage energy company. Another $3.1 million was transferred from different funds to the Spanish steel company.

The SEC is accusing Illarramendi of using clients’ money as if they were his and diverting millions of the investors’ funds. The commission says he breached his responsibilities as an investment adviser and abused clients’ trust. The SEC is seeking disgorgement of ill-gotten gains, permanent injunction, plus prejudgment interest.

Named as relief defendants that received investor money that they weren’t entitled are Michael Kenwood Asset Management LLC, MKEI Solar LP., and Kenwood Energy and Infrastructure LLC. Illarramendi, who is the majority owner of Michael Kenwood Group LLC, managed several hedge funds. One of the hedge funds has held up to $540 million in assets.

Related Web Resources:
SEC Charges Connecticut-Based Hedge Fund Manager for Fraudulent Misuse of Investor Assets, SEC, January 28, 2011
Read the SEC Complaint (PDF)

1940 Investment Advisers Act

Related Blog Posts:
Fontana Capital LLC Founder Violated Short-Selling Rule, Says SEC, Stockbroker Fraud Blog, February 2, 2011
3 Hedge Funds Raided by FBI in Insider Trading Case, Stockbroker Fraud Blog, November 23, 2010
$2.6M Texas Securities Fraud Settlement: Hedge Fund Adviser Settles SEC Allegations Involving Violations Related to Improper Public Stock Offering Participation After Short Selling, Stockbroker Fraud Blog, October 5, 2010 Continue Reading ›

Fontana Capital LLC Founder Violated Short-Selling Rule, Says SEC

Published on: February 2, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission has charged Forrest Fontana with violating Rule 105 of Regulation M and illegally making more than $1 million. The rule prohibits investors from taking part in public offerings when they have shorted the same securities. Fontana, who allegedly violated the rule three times, helped investors make the unlawful profits.

The SEC contends that in 2008, the ex-hedge fund manager and founder of Fontana Capital LLC, allegedly shorted 60,000 shares of XL Capital (now XL Group) and then shorted 40,000 shares of Bank of America‘s Merrill Lynch (BAC). On July 29, 2008, regulators claim that Fontana bought 50,000 shares of XL Capital and 200,000 shares of Merrill Lynch in secondary offerings. He made $149,000 off his XL capital bets and $792,000 from Merrill Lynch. Later that year, he allegedly shorted 100,000 Wells Fargo (WFC) shares. Fontana bought the same amount the next day and made a profit of about $160,000.

Under the 1933 Securities Act, Rule 105 of Regulation M is there to prevent short selling that can decrease proceeds for shareholders and companies by artificially depressing a stock’s market price right before a company prices its public offering. Rule 105 of Regulation is there to make sure that offering prices are established through the natural forces of supply and demand. Traders must wait five days after shorting a stock before they can take part in that company’s public offering. This prevents investors from using shorting to lower the price that they will pay later in the offering.

There will be a hearing to determine the veracity of the allegations against Fontana and whether sanctions should be issued.

Related Web Resources:
Hedge fund manager faces SEC allegations, Boston.com, January 8, 2011
Read the SEC’s administrative order (PDF)
Continue Reading ›

Hedge Fund Owner of Trueblue Strategies LLC Settles SEC Charges that He Hid Investor Trading Losses

Published on: December 18, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Hedge fund manager and investment adviser Trueblue Strategies LLC owner Neil Godbole has agreed to settle for $40,000 Securities and Exchange Commission charges that he hid his investors’ trading losses. Godbole also agreed to an advisory industry bar for a minimum of five years and to cease and desist from future 1940 Investment Advisers Act violations. By settling, he is not denying or agreeing that he committed any wrongdoing.

Per the securities fraud charges, Godbole started to manage the Opulent Lite LP, a now failed hedge fund, in 2005. At its height, the hedge fund managed about $30 million in assets and had about 70 investors. Until 2008, Godbole invested mainly in S&P index options and short term Treasury bonds.

In February 2008, he lost about $8.3 million as a result of a number of unprofitable deals, which he did not disclose. Also, the SEC claims that Godbole told investors that the fund was valued at $28.7 million when it was actually worth $18.5 million.

In attempt to make up the financial losses, Godbole started to use what he called a “rollover strategy” that involved the opening of options positions when each monthly trading period ended. The SEC says that throughout that year, the hedge fund manager misrepresented the fund’s trading results and asset value. When he told investors in December 2008 that the fund’s asset value was more than $26 million, the asset value had actually dropped to under $14.4 million.

The SEC says that any losses for that year that Godbole did disclose were “paper losses” related to the rollover strategy and in 2008, he had the hedge fund pay his management fees based on the inflated fund value. Investors were harmed when he had the fund redeem units at an inflated value.

It wasn’t until 2009 that Godbole notified investors of the funds’ losses and actual financial state. Many investors sought to pull out. The hedge fund was liquidated by March of that year.

Related Web Resources:

Saratoga fund manager settles with SEC, Business Journal, December 2, 2010

1940 Investment Advisers Act, SEC

3 Hedge Funds Raided by FBI in Insider Trading Case

Published on: November 23, 2010 | by Shepherd Smith Edwards & Kantas, LLP

As part of its growing investigation into possible inside trading in the $1.7 trillion hedge fund industry, the FBI has raided hedge funds Diamondback Capital Management LLC, Level Global Investors LP, and Loch Capital Management LLC, which has a close link to a witness who pleaded guilty in the insider trading probe involving hedge fund Galleon Group. (That investigation is one that prosecutors are calling the largest U.S. hedge fund insider trading case to date. Of the 23 people charged in civil or criminal court, 14 people, including ex- hedge fund S2 Capital LLC manager Steven Fortuna have pleaded guilty). Level Global Investors and Diamondback Capital Management are owned by ex-managers of Steven Cohen’s SAC Capital Advisors, which is also a hedge fund. Per public filings, Diamondback manages about $4.71 billion while Level Global manages about $3.09 billion.

The raids come just as federal prosecutors are getting ready to reveal a number of insider trading cases against hedge fund traders, Wall Street bankers, and consultants. In addition to trying to determine whether investment bankers and other parties let traders know about pharmaceutical company buyouts (companies have allegedly earned tens of millions of dollars in illegal profits because of secret information about mergers), officials are also looking at “expert network” firms that garner big fees from hedge funds for matching them with industry specialists.

Meantime, shares of Goldman Sachs Group Inc. dropped by 3.4% after The Wall Street Journal reported that the Justice Department is looking into possible leaks by Goldman employees about mergers.

Related Web Resources:
FBI raids 3 hedge funds in insider trading case, Reuters/Yahoo, November 22, 2010
Feds turn up heat on Wall St., raid 3 hedge funds, AP/Google, November 23, 2010 Continue Reading ›

$2.6M Texas Securities Fraud Settlement: Hedge Fund Adviser Settles SEC Allegations Involving Violations Related to Improper Public Stock Offering Participation After Short Selling

Published on: October 5, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Carlson Capital L.P. has agreed to pay over $2.6 million to resolve charges that it wrongly participated in 4 public stock offerings after short selling the same securities. The Texas securities fraud charges were brought by the Securities and Exchange Commission against the a Dallas-based hedge fund adviser. By agreeing to settle for $2,653,234, Carlson Capital is not denying or admitting to the allegations of securities misconduct.

According to the SEC, the Texas hedge fund violated Rule 105 four times and lacked adequate procedures and policies to keep the firm from taking part in the relevant offerings. During one occasion, Carlson Capital allegedly violated the rule even though the portfolio manager that purchased the offering shares and the one that sold short the stock were not the same person. The SEC determined that Rule 105’s “separate accounts” exception, which allows the purchase of an offered security in an account that is “separate” from the account used through which the same security was sold short, did not apply in this case. The SEC also found that the portfolio manager that sold short the stock during the restricted period had been given information indicating that the other portfolio manager was planning on buying the offerings.

Rule 105 of Regulation M
This rule helps prevent short selling, which can lower the proceeds received by shareholders and companies by artificially depressing the market price not long before the company issues its public offering price. Rule 105 is there to make sure that the natural forces of supply and demand, and not manipulation, sets the offering price. The short sale of an equity security during the restricted period and the purchase of the same security through the offering are prohibited.

During the SEC’s investigation into the allegations, Carlson Capital implemented remedial steps, including putting into place an automated system that assists in the review of the firm’s previous short sales prior to it taking part in offerings.

Allegations Against Goldman Sachs in $56M Securities Fraud Lawsuit Meet Morrison Standard, Says Australian Hedge Fund

Published on: September 14, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Basis Yield Alpha Fund says that its $56 million securities fraud lawsuit against Goldman Sachs Group Inc. should go to trial. The Australian hedge fund contends that its securities complaint, which accuses the investment bank of inflating certain collateralized debt obligations’ value, meet the standard recently articulated by the US Supreme Court in Morrison v. National Australia Bank. Goldman, however, contends that the transactions and securities under dispute do not meet the Morrison standard.

In the Supreme Court’s ruling, The judges limited Section 10(b) of the 1934 Securities Exchange Act’s extraterritorial reach by determining that the law was applicable only to transactions involving securities that took place in the United States or were listed on US exchanges. Following the decision, a district court ordered Goldman and Basis to use Morrison for determining whether there is grounds to drop the case. Goldman submitted its motion to dismiss and noted that the securities in the CDOs were not included on any US exchange list and that the underlying agreements were subject to English law and executed in Australia.

Meantime, Basis is arguing that its case is a “quintessential” securities fraud case involving a US sales transaction. The Australian hedge fund, which invested $42 million in “Timberwolf,” an AAA-rated tranche, and $36 million in an AA-rated tranche of CDOs, maintains that the CDO assembled mortgage-backed securities in Timberwolf came from the subprime real estate market in the US and was a New York sales transaction from beginning to end. The hedge fund was forced into insolvency when after investing in Timberwolf the CDOs value dropped dramatically and the fund sustained over $50 million in losses.

Basis contends that Goldman’s effort to make the transaction an Australian one that is not subject to federal securities laws has no legal or factual basis. It argues that adopting Goldman’s theory would nullify US securities law whenever a US seller committed securities fraud when effecting the sale of a security to a foreign buyer.

Related Web Resources:
Basis Yield Alpha Fund v Goldman Sachs Complaint, Scribd

Timberwolf Lawsuit: Goldman Sachs Sued By Australian Hedge Fund Over ‘Sh–ty Deal, Huffington Post, June 9, 2009

Read the Supreme Court Ruling (PDF)

Associated Securities Ordered by Arbitrators to Pay $8.8 Million to Investors for Losses in APEX Equity Options Fund

Published on: March 24, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Members of 16 different California households were sold shares of APEX Equity Options Fund which collapsed in August 2007. Collectively, these investors lost almost $9 million. They contacted an experienced securities law firm which advised them to jointly file a claim in Securities Arbitration through The Financial Industry Regulatory Authority (FINRA), formerly the National Association of Securities Dealers (NASD)

The investors claimed that Jeffrey Forrest of WeathWise LLC failed to properly advise them when selling the shares of the APEC fund. Because Forrest was licensed as a securities broker by Associated Securities, the claim in arbitration included claims against Associated, which is responsible to supervise the activities of its brokers.

Because of the large number of parties involved, hearings on the arbitration claim lasted for 12 days. After the conclusion of the hearings the three person arbitration panel deliberated, then rendered an award requiring the respondents to pay back these investors all of their losses of $8.8 million.

Hedge Fund Manager Settles SEC Charges He Helped Defraud Investors of Nearly $20 Million

Published on: September 18, 2008 | by Shepherd Smith Edwards & Kantas, LLP

A hedge fund manager has settled Securities and Exchange Commission charges that he misrepresented Pinnacle West, LLC and Sunquest Development, LLC as sound investments and, as a result, defrauded investors of almost $20 million. Mark Joseph Peterson Boucher will pay a $100,000 civil fine and will be barred from giving investment advice for five years. He also agreed to a permanent injunction from antifraud violations in the future.

Per the SEC’s complaint, the San Francisco-based hedge fund manager told clients that the real estate development companies did not have much debt and owned viable real property when, in fact, one of the companies did not own any property and the other company owned one property and had debts that exceeded potential profits. Along with the companies’ owners, Boucher was accused of using the invested funds for personal purposes. He is not agreeing to or denying the allegations by settling.

The SEC says that even though Boucher was not a registered investment adviser, he charged a fee to give clients advice. He is the author of the book The Hedge Fund on investing and the SEC says that he recommended the companies to clients in a newsletter that he owns.

Gary Paul Johnson, who owns 20% of Sunquest Development stock, also settled antifraud allegations. As part of his agreement with the SEC, Johnson will pay a $120,000 civil penalty, disgorge over $1.8 million in ill-gotten gains and about $700,000 in pre-judgment interest. Defendant and primary Pinnacle West owner John Earl Brake has not yet reached a settlement with the SEC.

SEC Charges Bay Area Investment Adviser, Others in Real Estate Investment Scam, SEC, August 27, 2008
Read the SEC Complaint (PDF)
Continue Reading ›

Hedge Funds Plead Guilty in Scam Costing Victims $194 Million

Published on: August 4, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Three hedge fund companies pleaded guilty to criminal conspiracy charges in a Florida Federal Court in a scheme that cost victims nearly $195 million. The defendants included KL Group LLC, Shoreland Trading LLC, and KL Triangulum Management LLC, U.S. Attorney R. Alexander Acosta said in a written statement.

These companies each admitted their role in running a hedge fund “scam” based out of West Palm Beach and Irvine, California, Acosta’s statement said. “The corporations admitted their complicity, through the attorney for their court-appointed receiver, in overseeing approximately $195 million in fraudulently obtained proceeds.” The companies will be sentenced in November.

Claims were also filed against three principles of the funds describing a scheme in which approximately 250 clients invested between 2000 and 2005. Although much of the money was apparently lost, a large amount of the funds allegedly went to the individuals’ personal use. Case documents say the defendants established opulent ocean-view offices in West Palm Beach with high-end furnishings and equipment. Prospective investors were given tours to view day trading purportedly using a proprietary system.

As Bear Stearns Hedge Fund Faced Liquidation its Head Manager’s Golf Game Did Not Suffer

Published on: July 9, 2007 | by Shepherd Smith Edwards & Kantas, LLP

As a sub-prime mortgage hedge fund managed by Bear Stearns encountered margin calls and was on the brink of liquidation, the situation apparently did not faze the golfing of its chief executive, John Cayne.

Weather permitting, Mr. Cayne hops a helicopter from Manhattan to a golf club in Ocean Township, N.J., landing on the grounds. According to posting on an online golf database, Cayne continued to golf through the weeks in June as one of his firm’s hedge funds was evaporating.

On June 14, the day Bear Stearns reported a 10 percent drop in its operating earnings for the second quarter, Mr. Cayne played a round of golf, shooting a 96, according to the online database. The next day, he played again.