Hedge Funds

Securities Fraud: Ex-Broker Jerry McCutchen Under Investigation for REIT Sales, Hedge Fund Manager Must Pay $18M to SEC, and NASAA Steps Up Fight Against Elder Financial Fraud

Published on: February 13, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Former Broker Is Subject of Numerous Securities Claims
If you are an investor who sustained losses after purchased real estate investments trusts with the help of former broker Jerry McCutchen, you may have grounds for a securities claim. According to the Financial Industry Regulatory Authority’s BrokerCheck Report, McCutchen is accused of making unsuitable investment recommendations and he has been the subject of over a dozen broker fraud claims alleging negligence, misrepresentations, and other claims.

In one case, McCutchen, while registered with Berthel Fisher & Company Financial Services, Inc., is accused of placing a couple’s retirement funds in speculative, illiquid, alternative investments that he misrepresented as safe investments in line with the husband and wife’s investment goal to keep their money safe. In reality the Tier REIT, the Icon Leasing Fund Twelve LLC, and others, did not have proper diversity or allocation and were not suitable for the couple.

McCutchen is not registered with any firm at this time nor is he a licensed broker at the moment. He was registered with Berthel Fisher & Co., Bay City Securities, Next Financial Group, First Funds Inc., FSC Securities Corp, Central Brokerage Services, Commonwealth Equity Services, MML Investors, Proequities Inc., and Walnut Street Securities.

NY Hedge Fund Manager Ordered to Pay $18M
Moazzam “Mark” Malik, and his American Bridge Investment Group LLC are facing SEC charges accusing them of bilking 19 clients of over $1M through the sale of limited partnership interests in a fake hedge fund that was run under different names. The SEC said that Malik claimed that the fund held $100M when that amount was never more than about $90,000. Now, the regulator is ordering Malik to pay $18M.
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RMBS Cases and Institutional Fraud: Morgan Stanley to Pay $62.9M, Hedge Funds File Lawsuit Against TWC Asset Management, and Deutsche Bank Must Contend With Allegations Claiming Investor Losses of $3.1B

Published on: February 3, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Morgan Stanley Settles RMBS Case with FDIC
Morgan Stanley (MS) will pay $62.9M to resolve allegations that it misrepresented residential mortgage-backed securities prior to the 2008 financial crisis. The deal was reached with the Federal Deposit Insurance Corp., which sued the investment bank on behalf of Colonial Bank in Alabama, Security Savings Bank in Nevada, and United Western Bank in Colorado. All three banks failed after or during the crisis. By settling, Morgan Stanley is not denying or admitting liability.

According to the FDIC, in offering documents Morgan Stanley misrepresented claims for 14 RMBS mortgage backed securities. This is not the first time the investment bank has reached a deal over RMBS with the FDIC. In 2015, the firm resolved similar claims brought on behalf of Franklin Bank in Texas for $24M.

Also last year, Morgan Stanley arrived at a deal for $2.6B to resolve a U.S. Department of Justice probe into mortgage bonds. The government accused the investment bank of misrepresenting the quality of home loans packed into bonds.

Assett Management Firm Must Face RMBS Lawsuit Brought by Hedge Funds
A New York Court refused to grant TCW Asset Management Company’s motion to dismiss RMBS fraud claims brought Basis Yield Alpha Fund and Basis Pac-Rim Opportunity Fund. The Cayman Island hedge funds claim that TWC Asset Management marketed a system for dealing with the RMBS market that it claimed could determine which were the good investments. The purported strategy involved the collateralized debt obligation Dutch Hill Funding II, Ltd., which took a net long position on high-risk RMBS.

The two hedge funds invested over $28.1M in Dutch Hill in May 2007. By July, their investment had become worthless. They sued TCW Asset Management Company in 2012, accusing the firm of fraudulent misrepresentations and a failure to choose Dutch Hill’s RMBS collateral in the ways that it promised. The Basis Funds contended that the defendant knew that the investment strategy couldn’t get the job done.

Hedge Fund Manager to Repay Investors $2.87M for Losses

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

QED Benchmark Management LLC and its hedge fund manager Peter Kuperman will resolve U.S. Securities and Exchange Commission charges accusing them of misleading investors about the QED Benchmark LP hedge fund’s historical performance and investment strategy. As part of their settlement they will pay back investors $2.8M in losses. However, by settling they are not admitting or denying the charges.

According to the SEC, the investment advisory firm and Kuperman did not disclose to investors that there were heavy trading losses. They purportedly did this by using a combination of real and hypothetical returns when giving out information about performance history. Marketing strategy included proposing to abide by a scientific stock-selection strategy using algorithms to concentrate on over 280 metrics in the areas of value, momentum, risk, growth, and estimates. The fund was supposed to select investments using the metrics to determine which ones would do better in the market.

QED’s offering memorandum and its limited partnership agreement said that no more than 20% of assets could be invested in any one security, while no more than 5% could be invested in a security that was illiquid. The SEC said that none of these agreements were honored.

Because of these alleged misrepresentations, QED Benchmark and Kuperman were able to secure millions of dollars from investors. The two of them are accused of not following the fund’s stated investment plan and placing most of the assets into one penny stock. Misleading and incomplete disclosures about the investment’s liquidity and value were also purportedly made. In just the first quarter that stock earned a 79% loss. When Kuperman presented potential investors with 2009 results, he did not disclose the bad returns and used hypothetical returns instead.
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Hedge Fund News: Fund Manager Steven Cohen Not Allowed Supervisory Role Until ’18, Father & Son Get Prison Term for Fraud, & Former New Stream Capital Executives Are Permanently Barred from the Securities Industry

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

The Securities and Exchange Commission says that billionaire Steven Cohen will not be allowed to supervise funds that oversee outside money or take on a supervisory position at any brokerage firm or investment adviser firm until 2018. The temporary bar is to resolve charges accusing him of not properly supervise Mathew Martoma. The ex-portfolio manager committed insider trading while at CR Intrinsic Investors. That firm is a subsidiary of S.A.C Capital Advisors LLC, which Cohen founded.

Cohen had been barred for life from the securities industry over said violations, although he was never charged in criminal court. However, because of an appeals court ruling in another case which impacted his case, hence the revised settlement. This latest deal will have caused Cohen to be barred from managing outside money for four years. He’s already been restricted for two of those four years.

The regulator says that before Cohen will be allowed to deal with external funds again an independent counsel will have to make sure that legally adequate procedures, policies, and supervisory mechanisms are implemented so that possible incidents of insider trading in the future are detected and stopped.

The SEC’s order also said that Cohen had ignored warning signs that should have compelled him to act immediately to find out whether or not Martoma was doing something illicit. Instead, he allowed him to make trades while making similar trades in accounts that he controlled. As a result of the insider trading, Cohen’s hedge funds made money while avoiding losses of about $275M.

Turing Pharmaceutical Martin Shkreli is Arrested, Faces Criminal and Hedge Fund Fraud Charges

Published on: December 21, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Ex-Retrophin CEO Martin Shkreli has been charged with fraud based on the time he worked as a hedge fund manager. The Securities and Exchange Commission claims the 32-year-old, who has just stepped down as the CEO of Turing Pharmaceutical, misappropriated funds from two hedge funds, made material misrepresentations, and engaged in other misconduct. His former outside counsel Evan Greebel faces SEC charges of aiding and abetting Shkreli’s alleged fraud.

According to the regulator’s complaint, the purported fraud occurred between 2009 and 2014 when Shkreli was portfolio manager for MSMB Capital Management LLP and MSMB Healthcare LP, which he both founded. The Commission claims Shkreli misappropriated about $120K from MSMB Capital Management to pay for personal expenses while misleading investors about the hedge fund and its size and performance. Shkreli said in July 2010 that the fund had returned over 35% when it actually lost about 18%.

Some of the other allegations against Shkreli are that he lied to one of the hedge fund’s executing brokers about its ability to sell a substantial short position in a pharmaceutical stock in an account. Because of this, the broker lost over $7 million, which this person then had to cover in the open market. Shkreli is also accused of misappropriating $900K in 2013 to resolve claims made by said broker from the short selling losses.

As for Greebel, he is accused of helping Shkreli to fraudulently persuade Retrophin, when he was CEO, to pay dissatisfied investors of his hedge fund who were threatening to take legal action. The two men allegedly had investors go into agreements with the pharmaceutical company by claiming that they were paying for consulting service when what they were doing was releasing Shkreli from possible claims. SEC Director Andrew Calamari said that the attorney’s purported involvement in the hedge fund fraud violated legal boundaries as well as ethical and professional duties.
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Hedge Fund News: Millennium Global Wants Citigroup to Pay $53M Over Shut Out Trades, Stone Lion Capital Suspends Redemptions Following Withdrawal Requests

Published on: December 12, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Millennium Global Emerging Credit Fund Ltd. is suing Citigroup (C). The hedge fund’s liquidators claim that the bank undervalued assets when it closed out certain trades during the financial crisis in 2008. They believe that Citigroup did this at rates that failed to reflect the true market value. Millennium sustained nearly $1 billion in losses. Now its liquidators want $53 million in damages.

The positions at issue were linked to the debt of Uganda, Sri Lanka, a brewer from the Dominican Republic. and a sugar company in Zambia. Citibank says the positions were illiquid and difficult to value even when the market was good. While the bank has admitted that it improperly valued certain trades, it maintains that the adjustments are not as great as what the hedge fund is claiming.

Millennium Global Emerging Credit Fund maintains that Citigroup did not use procedures that were “commercially reasonable” when it shut down the positions. The bank offered to pay Millennium about $6.8 million after more than fifty open transactions were closed out, but the fund believes that amount is way too low.

NY Man Convicted in $800K Hedge Fund Fraud

Published on: December 7, 2015 | by Shepherd Smith Edwards & Kantas, LLP

New York Attorney General Eric Schneiderman has issued a statement announcing the conviction of Mazzam Ifzal Malik, also known as Mark Malik, on 28 criminal charges that involved him stealing over $800,000 from investors. According to the state, the hedge fund manager set up fake hedge funds so he could take investors’ money.

During cold calls to investors in the United States and abroad, Malik claimed that he had extensive experience on Wall Street, including having managed over $5 billion in assets. Schneiderman, however, said that the 33-year-old only had been a financial consulting trainee. He also was a registered broker but for just two years.
Malik’s real job experience involved working as a traffic agent, waiter, and security guard.

Yet with this lack of experience, from ’11-’15 Malik managed the following bogus hedge funds:

• Wall Street Creative Partners • Wolf Hedge LLC.
• American Bridge Investments L.P.
• Seven Sages Capital, L.P.
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UBS Settles Pursuit Partners’ CDO Lawsuit Over Asset-Backed Securities

Published on: September 1, 2015 | by Shepherd Smith Edwards & Kantas, LLP

UBS AG (UBS) and Connecticut-based hedge fund Pursuit Partners have settled a securities fraud lawsuit accusing the brokerage firm of selling asset-backed securities without disclosing that they were going to be downgraded. The resolution was reached a day before trial was scheduled to start.

Pursuit Partners claims that UBS sold it $40.5M of collateralized debt obligations in 2007. The hedge fund contends that these were the same securities that UBS employees had called “crap” and “vomit” in emails. The securities fraud case was filed in 2008, with Pursuit seeking $100M.

According to the complaint, UBS purportedly failed to disclose to the Connecticut hedge funds that the firm had engaged in private conversations with employees of Moody’s (MCO) in 2007 about how the credit rating agency did not believe the securities should be rated as investment grade. When Moody’s downgraded them three months later the securities became practically worthless. The plaintiff contended that not only did it know the CDOs were about to become toxic securities but also they plotted to get rid of them by selling them to Pursuit.

Citigroup Affiliates to Pay $180M To Resolve Hedge Fund Fraud Charges

Published on: August 18, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Citigroup Global Markets Inc. (CGMI) and Citigroup Alternative Investments LLC (CAI) have consented to pay close to $180M to resolve Securities and Exchange Commission charges accusing them of bilking about 4,000 investors in the Falcon fund and the ASTA/MAT fund. The two hedge funds went on to fail during the financial crisis. The settlement money will go to investors who were hurt in the purported fraud.

According to an SEC probe, the Citigroup (C) affiliates made misleading and false misrepresentations to investors. The two hedge funds, managed by Citigroup Alternative Investments, were highly leveraged and sold only to advisory clients of Smith Barney and Citigroup Private Bank. They were sold by financial advisers associated with Citigroup Global Markets. Together, the hedge funds raised close to $3 billion in capital from investors before they went on to fail.

In its order, the SEC said that the ASTA/MAT fund bought municipal bonds and hedged interest rates by employing a Treasury or LIBOR swap. It described the Falcon fund as multi-strategy, invested in fixed-income strategies (including collateralized loan obligations, collateralized debt obligations, asset-backed securities) as well as in the other hedge fund.

Investors claim that the two affiliates misrepresented the hedge funds as low-risk, safe, and suitable for bond investors looking for traditional investments, when, in fact, the funds were high risk. They contend that even as the funds started failing, CAI accepted close to $110 million in investments.

Hedge Fund Advisory Firm to Pay the SEC $5M to Settle Fund Valuation Scam Allegations

Published on: July 1, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is charging AlphaBridge Capital Management and its two owners with fraudulently inflating the prices of securities in hedge fund portfolios that the firm managed. The feeder funds involved are the private funds AlphaBridge Fixed Income Partners, LP and the AlphaBridge Fixed Income Fund, Ltd.

The securities in question are inverse, interest-only floaters and interest only floaters. Both are tranches of collateralized mortgage obligations. To settle the charges, the Connecticut-based investment advisory firm and its owners, Michael J. Carino and Thomas T. Kutzen, will pay $5M.

According to the regulator, AlphaBridge told investors that broker-dealers provided it with independent price quotes for residential mortgaged-backed securities that were thinly traded and unlisted even though the firm derived these valuations internally. The hedge fund advisory firm purportedly told brokers to say that the valuations came from their brokerage firms.