Hedge Funds

Following Securities Fraud Allegations, Visium Asset Management and Alliance Bernstein Reach Preliminary Sales Deal

Published on: July 21, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Visium Asset Management has arrived at a preliminary sales deal with AllianceBernstein Holding LLP (AB). As part of the agreement, the asset manager will sell the Visium Global Fund, which was its remaining hedge fund. It was just recently that three of Visium’s traders were accused of securities fraud, including the mismarking of securities, and insider trading.

This week, former Visium Asset Management portfolio manager Stefan Lumiere pleaded not guilty to charges accusing him of taking part in a scam to bilk investors. The 45-year-old allegedly inflated a bond fund’s value while overstating its liquidity. The criminal charges against him are securities fraud, conspiracy, and wire fraud.

Last month, former Visium hedge fund manager Sanjay Valvani committed suicide after he was arrested for insider trading that would have occurred from ’05 to ’11. Prosecutors said that he used confidential information about drug approvals to make illegal trades. Valvani allegedly made $25M from the insider trading. Prior to his death he pleaded not guilty to conspiracy, wire fraud, and securities fraud.

Hedge Funds Continue to See Losses

Published on: July 15, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Bloomberg reports that in the 12 months ending in March 2016, funds of hedge funds lost over $100M due to poor performance and outflows. The figures come from eVestment, a research firm that examined data from over 2,500 funds.

According to eVestment’s report, over those four quarters hedge fund clients withdrew $50.3B, whiles managers reported $51.5B in investment losses. Assets in the hedge fund sector dwindled 11% to $841.6B. They have not been that low since June ’09.

Funds of funds invest in hedge fund portfolios. They used to be the largest single investor of these funds and at one point were accountable for nearly 50% of assets. Now they comprise just 28%, reports eVestment. Returns for funds of funds have not improved this year so to date.

Known investors that have begun to pull out significant money from hedge funds include the New York city pension plan, American International Group (AIG)MetLife (MET), and others. The New York Times reports that Larry Robbins of Glenview Capital Management and William Ackman of Pershing Square Capital Management, two of the most well-known hedge fund managers, have lost money consistently. Viking

Securities Headlines: SEC Announces $17M Whistleblower Lawsuit, Delta Employees File 401(K) Lawsuit Against Fidelity, Blackstone President Says Hedge Funds Could See 25% Asset Loss, and Deutsche Bank is Fined $6M By FINRA

Published on: June 29, 2016 | by Shepherd Smith Edwards & Kantas, LLP

SEC Issues Its Second Largest Whistleblower Award
U.S. Securities and Exchange Commission has awarded the ex-employee of a company more than $17M for a whistleblower tip that helped move the regulator’s probe forward, ultimately resulting in a successful enforcement action against that company. This is the second largest award that the regulator has issued since it started its whistleblower program in 2011.

To date, the program has awarded over $85M to 32 whistleblowers. The largest SEC whistleblower award so far has been $30M and it was issued in 2014. In the last five months alone, five whistleblowers have been awarded over $26M.

Under the SEC whistleblower program, whistleblowers may be entitled to receive a monetary award if the information they’ve voluntarily given the regulator is original and helpful, resulting in an enforcement action, and the monetary sanction arrived at is greater than $1M. In such cases the whistleblower may be entitled to 10-30% of the funds collected. The payments come out of an investor protection fund paid for by monetary sanction payments issued to the SEC for securities law violations.

Delta 401(K) Participants File Lawsuit Against Fidelity
Fidelity Investment units are now defendants in a 401(K) lawsuit filed by participants in a Delta Air Lines Inc. retirement plan. The plaintiffs want class action status.

They claim that Financial Engines, which was retained to give investment advice to the Delta Family-Care Savings Plan, is paying Fidelity a substantial chunk of the fees it receives from the 401(k) plan members. This has purportedly inflated the cost of investment advice services that are essential to the plan and is a violation of Fidelity’s fiduciary duty. They also claim that Fidelity’s management of BrokerageLink, a self-directed brokerage account, acquires share classes with high expense ratios that pay the broker dealer significant revenue-sharing payments. The plaintiffs believe Fidelity is “effectively” utilizing the assets of the plan to its benefit.

Fidelity claims the allegations are meritless.

Bondholders Sue Puerto Rico As Debt Talks Falter

Published on: June 27, 2016 | by Shepherd Smith Edwards & Kantas, LLP

A group of hedge funds in New York that invested in Puerto Rico general obligation bonds are suing the island’s government. The bond lawsuit came just days before the island is expected to default on a $2 billion debt payment due, including over $700 million in general obligation bonds on July 1, and on the same day that the island announced it was ending talks with bondholders about debt payments.

The negotiations has resulted in a number of failed proposals and counterproposals, but no resolutions. The U.S. Commonwealth continues to owe $70 billion in public debt, including $12.5 billion in general obligation debt.

The hedge funds’ complaint seeks to invalidate a law allowing Puerto Rico Governor Alejandro Garcia Padilla to put into effect a temporary debt moratorium. The bondholders contend that when they purchased the general obligation bonds, they had counted on the protection that was supposed to guarantee the bonds under the territory’s constitution.The hedge funds are arguing that they are entitled to be paid first—and in full—and on time. They claim that the the moratorium cannot be applied to the bonds that they hold. Also, the hedge funds are accusing the Puerto Rico government of improperly diverting tax revenue to the Puerto Rico Sales Tax Financing Corp. (COFINA) so more debt could be issued while bondholders were not paid.

Tennessee Investment Advisory Firm Accused of Trying to Collect Extra Fees from Hedge Funds

Published on: June 8, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging Hope Advisors Inc. and owner Karen Bruton with scheming to get two hedge funds that they managed to pay them extra fees. The private hedge funds are HDB Investments LLC and Hope Investment LLC.

The purported misconduct was discovered by the regulator’s Atlanta office, which was examining the Nashville, Tennesse-based firm and Bruton. The regulator claims that Hope Advisors and Bruton sought to get around the funds’ fee structure, which lets the firm receive fees from the funds only if their profits for the month exceeds previous losses. The firm and Bruton are accused of orchestrating a number of trades that would let the funds make a bigger gain closer to the end of the month and guarantee a big loss early on at the start of the next month.

The SEC said that if it weren’t for the fraudulent trades, Hope Advisors would have earned almost no incentive fees for close to two years. Instead, claims the Commission, the firm managed to avoid realization of over $50M in losses while making millions of dollars in fees that they should have never been paid.

Hedge Funds Continue to See Investor Exodus

Published on: May 6, 2016 | by Shepherd Smith Edwards & Kantas, LLP

According to Bloomberg, in the last two quarters, investors have withdrawn nearly $17M from hedge funds—that’s more money than what they invested in the funds. They’re also calling on struggling funds to reduce the fees of 2% of assets and 20% of profits that they’re usually charged. The reason for their actions is that hedge funds haven’t been doing so well lately as they’ve failed to keep up in the bull market.

Hedge fund-related losses were $537M in the first quarter. That’s a significant decline from last year’s first quarter which saw a $246M profit.

Investors are not alone in their dissatisfaction. Some of the biggest financial players in the world haven’t had the kindest words to say about the funds.

Just this April, billionaire Warren Buffet told investors at the yearly Berkshire Hathaway shareholder meeting to stay away from the hedge funds because of the poor returns and high fees. Speaking at the Milken Institute Global Conference earlier this week, Cohen spoke about what he perceived was a “lack of talent” in the hedge fund industry. Cohen formerly ran SAC Capital Advisors before he was forced to plead guilty to securities fraud.

Hedge Fund Investors Want to Withdraw $1.4 Billion from Brevan Howard Master Fund

Published on: April 26, 2016 | by Shepherd Smith Edwards & Kantas, LLP

According to Bloomberg sources say that investors in Brevan Howard Asset Management’s primary hedge fund are asking to withdraw about $1.4M from the fund in the wake of successive yearly declines and losses from the first quarter.The fund is the Brevan Howard Master Fund, which invests in different asset classes.

As of the end of March the fund managed $17.6M, which is an approximately a $27B decline from two years ago. Brevan Howard has until the end of June to meet investors’ redemption requests.

Its investors aren’t the only ones seeking their money back. According to Hedge Fund Research Inc., many other investors were not happy with the way a number of hedge funds have performed recently when there was trouble in the markets. Last quarter, investors pulled more money from the funds than they have since the end of the financial crisis.

Recently, reports New York City’s pension for its civil employees voted to take out $1.5B from hedge funds. The New York City Employees Retirement System took its investment out of a number of hedge funds due to unsatisfactory performances. Meantime, Tudor Investment Corp.’s clients asked to take out over $1.B from the firm in the wake of unimpressive results over the last three years.

Sen. Elizabeth Warren Calls Out the SEC for Not Stopping Hedge Fund Billionaire Steven Cohen From Starting New Hedge Fund

Published on: April 21, 2016 | by Shepherd Smith Edwards & Kantas, LLP

U.S. Senator Elizabeth Warren chastised the Securities and Exchange Commission for not barring billionaire Steven Cohen from starting a new hedge fund just months after the regulator scolded him for not properly overseeing an ex-employee convicted of securities fraud.

In 2013, Cohen’s SAC Capital consented to pay $1.8 million and pleaded guilty to fraud charges accusing the hedge fund of allowing insider trading to take place. It wasn’t until January of this year, however, that the SEC told Cohen that he was barred from managing the money of other people until 2018. Now, however, he is already involved in efforts to start Stamford Harbor Capital, a new hedge fund, of which he owns 25%.

Criticizing the SEC in a letter to its chairperson, Mary Jo White, Senator Warren said that Cohen’s application to start the new hedge fund, which the Commission approved, is just another example of the regulator’s enforcement actions failing to properly punish parties that are guilty, not protecting investors, and failing to impede future wrongdoing. It was just this January that Warren said that she believed that U.S. companies manage to commit crimes in part because of poor enforcement. She pointed to the SEC as an agency that often does not succeed in using the full scope of its enforcement powers.

In its case against Cohen, the SEC accused him of not properly supervising Mathew Martoma, who was convicted in of insider trading that allowed SAC to make gains and avoid losses of $276M. (Martoma is appealing his conviction.) While Cohen did not admit to wrongdoing when settling the SEC case, he did retain an independent consultant to ensure legal compliance.

Hedge Funds Sue Puerto Rico’s Government Development Bank Over Assets

Published on: April 9, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Problems continue to plague Puerto Rico as its financial situation continues to deteriorate. Just recently, as things have worsened for the U.S. territory, a number of hedge funds have asked the United States District Court in San Juan, Puerto Rico to freeze the assets of the Commonwealth’s Government Development Bank (“GDB”). The hedge funds, who are large owners of Puerto Rican debt, are accusing the bank of insolvency and spending its remaining money to help support other sectors of the island’s beleaguered government.

The plaintiffs in the case include Claren Road Asset Management and Brigade Capital Management. The hedge funds reportedly hold about $3.75 billion of the bank’s debt.

In their lawsuit, the hedge funds said that the GDB has not provided the financial data that creditors have requested. They want the Court to prohibit additional cash transfers except for those that are necessary. The hedge funds do not want public entities, municipalities, and other depositors to be able to take their money out.

The plaintiffs expressed concern that should the GDB run out of funds, a lot of essential services may have to stop and creditors would sustain significant losses. The GDB has a debt payment due on May 1 of about $422 million. In response to the hedge funds’ case, GDB President Melba Acosta-Febo claimed that the accusations made in the complaint are “erroneous” and allegations that the GDB knowingly kept back financial information in order to preference deposits over bondholders are “wholly false.”

The hedge funds believe that GDB kept giving loans even while knowing these loans would likely not be repaid.

Securities Fraud: SEC Charges Unregistered California Man with Fraud, FINRA Bars Two Brokers, Second Scam Lands Man in Jail Again

Published on: February 17, 2016 | by Shepherd Smith Edwards & Kantas, LLP

SEC Files Charges in $1.9M Broker Scam
A California man is facing Securities and Exchange Commission charges. The regulator is accusing Gregory Ruehle of fraudulently selling purported stock in a medical device company and keeping investors’ money. The unregistered broker purportedly raised about $1.9M from over 100 investors but did not transfer or deliver the securities that they purchased to them. Meantime, Ruehle is said to have used the funds to cover his personal spending and pay off gambling debts.

According to the SEC, Ruehle began bilking investors in 2012. He allegedly misrepresented to investors in Minnesota and California that he would sell them securities that he owned in ICB International Inc., for which he was a former consultant.

Instead, said the regulator, Ruehle sold investors more securities than what he owned and he failed to tell them that the securities that belonged to him were not transferrable. Ruehle is accused of generating fake documents that he claimed came from the company and issuing bogus company stock certificates to investors, along with a letter that falsely stated that the stock had been transferred to them.

The SEC wants permanent injunction, disgorgement, prejudgment interest, and penalties against Ruehle. The unregistered broker is also now the subject of criminal charges in a parallel case that was brought by U.S. Attorney’s Office for the Southern District of California.

FINRA Bars Two Men for Hedge Fund Fraud
In other broker news, the Financial Industry Regulatory Authority has announced that it is barring brokers Walter F. Grenda and Timothy S. Dembski from the securities industry. The industry bar is for fraud involving the sale of the Prestige Wealth Management Fund, LP, which is a hedge fund.
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