Articles Posted in Hedge Funds

Investment Advisor Firm Accused of Paying Off Terminally Ill Patients to Commit Fraud
The SEC has filed fraud charges against Donald Lathen and his Eden Arc Capital Management. Lathen is accused of recruiting at least 60 individuals who had less than six months to live and agreeing to pay them $10K each for the use of their names on joint brokerage accounts. When one of these individuals would die, he would allegedly redeem the investments by falsely representing that he and the terminally individual person were joint account holders.

Lathen recruited the terminally ill patients through contacts he had at hospices and nursing homes. In reality, it was Lathen’s hedge fund that owned the option investments.

As a result, of the purported omissions and misrepresentations, issuers paid over $100M in early redemptions. Lathen is accused of violating the custody rule by not properly putting the securities and money from the hedge fund in an account under the name of the fund or in one that held only client money and securities.

SEC Stops Trading in Neromamam Ltd.
The SEC has stopped the trading of Neuromama Ltd. (NERO) shares. The shares trade on the mostly unregulated over-the-counter markets and the regulator is concerned about transactions that may be “potentially manipulative, as well as other red flags that have purportedly been cropping up for years.

Neruomama’s paper value went up times four to $35B this year despite not much volume. The company’s shares went up by four times to $56/share. (On January 15, ’14, its value was $4.73B.)

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A group of hedge funds that are holding Puerto Rico debt are suing the U.S. territory and Governor Alejandro García Padilla. Monarch Alternative Capital, Aurelius Capital Management, Stone Lion Capital Partners, Covalent Capital Partner, Aurelius Capital Management, Fundamental Credit Opportunities, and a number of other funds claim that Puerto Rico and Governor García violated PROMESA, which stands for the Puerto Rico Oversight, Management and Economic Stability Act. President Barack Obama signed the new debt restructuring law on June 30, which is when García issued a debt moratorium on the nearly $800 million in general obligation debt that was due on July 1 (along with other Puerto Rico debt for a collective total of about $2 billion). The hedge funds say that Governor García had no legal right to call a debt moratorium in the wake of PROMESA.

The bondholders want the court to stop the island from “unlawfully dissipating” assets before a federal oversight board is appointed. PROMESA places the U.S. territory under the supervision of the board, which is tasked with pressing for fiscal reform and supervising spending. However, the board won’t be in place for at least two months.

In their complaint, filed in United States District Court for the District of Puerto Rico, the creditors claimed that Governor García took advantage of this time gap in implementation and is spending hundreds of million dollars in ways that garner “political favor.” The hedge funds argued that certain expenditures would have been challenged by the board if it were already in place.

The plaintiffs, as holders of general obligation bonds, say they are entitled to some of the money being spent because Puerto Rico still owes them the debt payments. They want the district court to freeze the payments that have been issued and mark them as invalid until the board can take a look at them.

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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.

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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.

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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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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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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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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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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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SEC Says New York Hedge Fund Manager Stole From Investors

The U.S. Securities and Exchange Commission says that Moazzam Malik, a purported hedge fund manager in NYC, stole money from investors. Malik allegedly falsely claimed to be running a hedge fund holding about $100 million in assets under management. He is accused of touting high returns.

Malik raised over $840,000, but his fund, which didn’t make actual investments, never held over $90,177 in assets. Instead, he kept taking out money and spending the funds. He refused to give investors back their money, even pretending to be a fund employee and sending out an e-mail saying that he had passed away. Mailk purportedly kept soliciting investors even as he received redemption requests.