Hedge Funds

SEC Alleges that a Hedge Fund, Its Owner and Its Chief Trader Illegally Earned $57 Million in a Late-Trading Scam.

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

The Securities and Exchange Commission filed suit in a New York Federal Court contending that Simpson Capital Management Inc., its owner and its head trader entered into late-trades in hundreds of mutual funds, defrauding the funds and their shareholders of approximately $57 million.

The SEC claims that the defendants placed more than 10,000 unlawful mutual fund trade orders after the market closed, enabling them to take advantage of knowledge of after-market events while receiving the price previously established that day as the fund’s closing net asset value. Simpson Capital is the investment adviser to two hedge funds, Simpson Partners L.P. and Simpson Offshore Ltd.

The SEC further charged that the firm’s owner, who was also an investor in the Simpson Funds, “personally earned at least $19 million in fees and profits” as a result of the fraudulent transactions, adding that the head trader “received more than $996,000 in salary and bonuses during the late trading scheme.” The SEC is asking the court to order permanent injunctions, disgorgement plus prejudgment interest, and civil penalties.

Merrill Lynch Seizes $400 Million of Assets from a Bear Stearns Managed ‘Subprime’ Hedge Fund for Failing to Meet Margin Calls

Published on: June 21, 2007 | by Shepherd Smith Edwards & Kantas, LLP

A hedge fund managed by Bear Stearns that takes both bullish and bearish positions in subprime loans has been hit heavily by conditions in that market. Some of the fund’s assets were held at Merrill Lynch, on margin. When the equity in the fund dropped, Merrill issued margin calls.

The hedge fund reportedly began with about $600 million in investor capital, $40 million of that from Bear Stearns and its executives, then borrowed $6 billion from Wall Street lenders, including Merrill, Goldman Sachs, Bank of America and Deutsche Bank.

As the fund’s assets lost market value, the Bear Stearns managers scrambled to sell hundreds of millions of dollars in assets to satisfy demands for cash and assets from creditors to stave off liquidation of the fund. The managers auctioned almost $4 billion in mortgage bonds, and attempted to present a 30-day plan to sell more assets, but was unable to persuade Merrill to refrain from seizing assets.

Proposed Act Requires SEC Registration of Hedge Fund Advisers

Published on: May 28, 2007 | by Shepherd Smith Edwards & Kantas, LLP

U.S. Senator Charles Grassley has introduced legislation that would require most hedge fund advisers to register with the Securities and Exchange Commission. Called the Hedge Fund Registration Act, the bill closes a loophole created by the U.S. Court of Appeals (DC) when it struck down a 2004 SEC rule requiring most hedge fund advisers to register with the agency.

That ruling lets hedge fund advisers count the different funds they manage as just one client, rather than noting the number of investors who have purchased into each fund. Because of this, the majority of hedge fund advisers do not have to register with the SEC because they fall under the 1940 Investment Advisers Act exemption.

Senator Grassley says that if the bill were passed, only advisers with less than 15 clients would be exempt from registering. An adviser exempted from registration would also have to oversee less than $50 million and could not publicly “hold himself out” as an adviser.

Former UBS Vice President Pleads Guilty To Conspiring With Hedge Fund Operator And Founder Of Capital Management Group To Bilk At Least $2.5 Million From Over 40 Investors

Published on: March 7, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Attorney’s Office says that Justin Paperny, a former account vice president at UBS Financial Services, Inc., has pleaded guilty to helping Capital Management Group founder Keith Gilabert bilk at least $2.5 million from investors.

Paperny pled guilty to wire fraud, securities fraud, and conspiracy to commit mail fraud, while admitting that he helped Gilabert fraudulently run GLT Venture Fund. Paperny also said that he lied to investors so that they would invest in the fund, took kickbacks from Gilabert, and conspired with him to mislead investors about the hedge fund’s performance history, the oversight of Capital Management Group by his brokerage firm, and any risks connected to investing in Capital Management Group.

That said, Paperny also says that he informed management at the brokerage firm that GLT had not been adhering to its investment strategy and that authorities at his firm knew of Gilabert’s fraudulent behavior. The investigation is pending. Paperny faces a possible 5-year federal prison term. He has agreed to cooperate with investigators as a condition of his guilty plea.

The NASD Charges Two Former Prudential Brokers And A Branch Manager With Helping A Hedge Fund Manager Engage In Market Timing Through Variable Annuities

Published on: March 1, 2007 | by Shepherd Smith Edwards & Kantas, LLP

On February 15, the NASD announced that it was charging two former prudential brokers with helping a hedge fund manager to time the market through variable annuities. The former broker’s supervisor was also charged with failure to properly supervise them. Both brokers were registered with Prudential Securities Inc., now called Prudential Equity Group, during this time.

David Corn and Jeffrey Doerr allegedly helped Paul Saunders, a client, by opening 20 accounts for him under the names of a number of limited partnerships that had been created by Saunders. The limited partnerships had the same beneficial owners as James River Capital Corp., which was Saunders’s market timing hedge fund. The NASD says that the two brokers should have known their client would use the accounts for the purpose of market timing variable annuities and that the limited partnership had the same beneficial owners.

The SRO says that, between October 2001 and September 2003, Saunders executed about 900 variable annuity sub-account transactions with the brokers’ help. These transactions earned about $5.2 million, while violating the restrictions set up by insurance companies that offered annuities. The two brokers made about $45,000 each from these trades and their commissions.

U.S. Bankruptcy Court Says Bear Stearns Must Pay More Than $125 Million for Collapsed Hedge Fund Fiasco

Published on: February 28, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Bear Stearns Securities Corp. is being ordered to pay over $125 million to a bankruptcy trustee because of Manhattan Investment Fund, a collapsed hedge fund used by hedge fund principal Michael Berger to run a large scale fraudulent investment scam. The ruling was issued on February 15 by the U.S. Bankruptcy Court for the Southern District of New York.

Berger, who was a fugitive and a convicted felon, had created and used the fund through his company, Manhattan Capital Management Inc., to engage in fraud-an action that led to a number of regulatory and criminal actions. The SEC had even filed a securities fraud complaint against MCM, Berger, and Manhattan Investment Fund in January 2000, even obtaining an asset freeze. Two months later, Helen Gredd, the fund’s receiver, filed for Chapter 11 bankruptcy on the fund’s behalf.

According to the court, the fund made 18 transfers, worth approximately $141.4 million in total, in the year before filing for bankruptcy. Funds were transferred from Bank of Bermuda to a Bear Stearns-maintained account with Citibank. The funds were then transferred to a Bear Stearns account and used for securities trading.

Securities Officials In Massachusetts File Charges Against Bulldog Investors And Principal, Phillip Goldstein

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

The Massachusetts Division of Securities has filed an administrative complaint against Bulldog Investors General Partnership and the company’s principal, Phillip Goldstein. Bulldog Investors and Goldstein, as well as other individuals and firms, are being charged with offering unregistered securities for the purpose of selling them in Massachusetts.

The securities officials claim that the hedge funds allegedly failed to restrict prospective investors from accessing general advertising and offering content on their web site. The securities division says that while hedge fund offerings do not have to be registered with the Massachusetts Division of Securities, there are SEC guidelines for making private offerings online. This includes making sure that private offerings are password-protected so that only the potential investors that the issuer has assessed as sophisticated enough or properly accredited can view the materials. According to the complaint, Bulldog did not control access to the information, which “constitutes an unregistered, non-exempt public offering of securities in Massachusetts.”

Goldstein allegedly told the division that anyone who agreed to view the offering content online had to agree that the information was not a solicitation. The complaint however, claims that , “A disclaimer such as the one on the Bulldog web site does not constitute an appropriate or adequate control over a publicly accessible Web site that displays advertising and/or offering materials for securities.”