February 13, 2015

Securities Fraud Cases: NY Hedge Fund Manager Bilks Investors of Over $800K, Maize Fund Scam Leads to Restitution, Madoff Ponzi Scheme Victims Get $355M, and Kentucky Scheme Ends with Probation, Compensation

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.

Maize Fund Investment Scam Leads to $6.7M Restitution
The U.S. Commodity Futures Trading Commission has gotten a federal court order demanding that Scott M. Ross and his Maze Asset Management LLC, Maize Capital Management, LLC and his Maize Capital Management LLC pay $5.4 million in restitution and a $1.3 million civil penalty for his Maize Fund investment scam. Ross is serving time behind bars for his involvement in two other financial scams.

Ross and his companies are accused of making false statements to prospective customers, putting out bogus account statements reflecting trading profits when there were none, mishandling client funds, and not properly registering as a Commodity Pool Operator with the CFTC. The regulator’s complaint charged Ross and the companies with violating core anti-fraud Commodity Exchange Act provisions related to their solicitation and managing of the Maize Fund, which is a pooled foreign exchange account.

Madoff Ponzi Scam Victims Get Back Another $355M
According to the Securities Investor Protection Corporation, about $355 million will be returned to the victims of the Bernard Madoff Ponzi scam. Along with a $497 million settlement reached with federal funds Primeo Fund and Herald Fund, some $10.5 billion has been recovered in the liquidation proceedings for the scheme that bilked inventors of billions of dollars.

This is Madoff trustee Irving Picard’s fifth distribution of recovered moneys to Madoff customers. He is in charge of the Securities Investor Protection Act liquidation of Bernard L. Madoff Securities LLC.

$1.3M Restitution in Kentucky Securities Fraud Case
The Department of Financial Institutions says that Pamela Jean Williams and Richard Dow Williams must pay over $1.3 million in securities fraud restitution to five victims. If they don't pay, then their sentences of one year and three years, respectively, would go from probation to time behind bars.

The Williamses were charged on multiple counts of selling unregistered securities, fraudulent securities practices, and omitting or misrepresenting material facts about a gas well investment. Each pleaded guilty to one consolidated fraud charge and has agreed to pay restitution.

Fraudulent Hedge Fund Manager Moazzam Malik Fakes Own Death, ValueWalk, February 16, 2015

Federal Court Orders Scott M. Ross and his Companies to Pay More than $6.7 Million in Restitution and a Civil Monetary Penalty for Defrauding Investors in His Commodity Pools, Mishandling Customer Funds, and Failing to Properly Register as a Commodity Pool Operator, CFTC, February 13, 2015

Madoff's Victims Are Repaid Another $355 Million, Trustee Says, NPR, February 9, 2015

More Blog Posts:
Sun Antonio Spurs Star Tim Duncan Files Texas Investment Adviser Fraud Case, Stockbroker Fraud Case, January 31, 2015

Standard & Poor’s Settles Inflated Ratings Case for $1.5 Billion, Institutional Investor Securities Blog, February 3, 2015

SEC Subjects Credit Rating Agencies, Asset-Backed Securities Issuers to Tighter Rules, Stockbroker Fraud Blog, August 28, 2014

Magoffin man, woman ordered to pay more than $1.3 Million in securities fraud case, Floydcountytimes, February 12, 2015

February 4, 2015

Hedge Fund Fraud Leads to Criminal Convictions

Francisco Illarramendi has been sentenced to 13 years behind bars for a Connecticut securities scam that involved hundreds of millions of dollars from the state oil company of Venezuela. The 45-year-old ex-hedge fund manager said he committed the crimes to conceal investment losses and because he was pressured by corrupt government officials in the South American country.

Illarramendi, a Venezuelan-American, devised a currency arbitrage market that he claims made $60 billion for the government in Caracas, which kept it from failing. In 2005, he began his hedge fund scam to conceal $5 million in losses in a failed bond transaction that was made for the Venezuelan government. Illarramendi contends that he and his family were threatened with violence if they refused to go along.

The judge, however, noted that the former hedge fund manager took $20 million for his own purposes. In time, the fraud grew as Illarramendi continued to use his hedge funds to cover what now exceeded over $500,000 million. He also paid million of dollars in bribes to government officials in Venezuela for sending the oil company’s money to him, which he invested. Illarramendi pleaded guilty to fraud and conspiracy to obstruct justice in 2011. To date, the court appointed receiver has recovered enough to pay investor claims of over $345 million but more needs to be recovered.

Meantime, in the U.K., hedge fund manger Magnus Peterson has been found guilty of fraud, false accounting, forgery, and fraudulent accounting in an unrelated case. Peterson founded Weavering Capital.

Investors lost $536 million when Weavering Macro Fund failed in 2009. The fund had been marketed as producing returns that were stable and low risk. Instead, it collapsed after the discovery that a multimillion-dollar trade in the flagship fund was connected to an offshore company that Peterson controlled.

The U.K.’s Serious Fraud Fund accused Peterson of misleading investors for several years and working with swap trades to artificially inflate the Weavering Macro Fund’s performance. He took about $8.8 million of investors’ money.

Hedge Funds
These are minimally regulated private investment partnerships that typically only accept wealthy investors. These investment vehicles usually have a lot of flexibility when it comes to investment strategies that may be used.

Hedge funds can invest in bonds, equities, futures, options, arbitrage, commodities, illiquid investments, and derivative contracts. They can be very profitable when the market is volatile and are not for all investors.

The SEC and the Commodities Futures Trading Commission say there are several signs of hedge fund fraud:

• Audit problems
• Lack of independence when trading
• Investor complaints
• Hedge fund fraud lawsuits have already been brought
• Strong performance claims that are unusual
• Valuation problems
• Hedge fund mangers trading in their accounts

Hedge fund fraud can lead to investment losses. Contact our Hedge fund securities lawyers today.

Hedge Fund Information for Investors, FBI

London Hedge Fund Founder Sentenced to 13 Years in Prison, The New York Times, January 23, 2015

Boss Of Largest Ponzi Scheme In Conn. History Gets 13 Years, Law360, January 30, 2015

Hedge fund boss who cost investors £350MILLION when his Mayfair-based firm collapsed due to his rogue trading is jailed for 13 years, DailyMailUK, January 23, 2015

More Blog Posts:
California Insider Trading Ring Made Almost $750K in Illegal Profits, Says the SEC, Stockbroker Fraud Blog, February 5, 2015

UBS Settles SEC Dark Pool Case for $14M, Stockbroker Fraud Blog, January 16, 2015

NY Sues Barclays Over Alleged High Speed Trading Favors in Dark Pool
, Stockbroker Fraud Blog, June 26, 2014

January 23, 2015

Insider Trading News: SEC Sues Ex-Capital One Data Analysts, U.S. Attorney Bharara Wants Rehearing in Case Involving Overturned Convictions, and Judge Vacates Four Men’s Guilty Pleas

Ex-Capital Data One Analysts Are Defendants in SEC Insider Trading Lawsuit
The U.S. Securities and Exchange Commission is suing Nan Huang and Bonan Huang, two former Capital One data analysts, for insider trading. The regulator contends that the two of them used nonpublic data to trade in consumer retail companies’ shares before earnings and sales reports were issued. They allegedly used sales information that the credit card company had collected from millions of customers.

According to the SEC lawsuit, from 11/13 to 1/15 the two analysts made hundreds, perhaps thousands of keyword searches for sales information on at least 170 companies that are publicly traded. They had access to this data because part of their job was to serve as fraud investigators.

The Commission says that the two men knew how to examine the information to figure out whether a company’s sales were going up or down. From 1/12 to 1/15 Huang and Huang purportedly made $2.83 million via share trades, in some instances using call options and put options to make the trades. Stocks that they traded included those belonging to Apple. Capital One fired the two men earlier this month.

U.S. Attorney Preet Bharara Seeks Rehearing Regarding Ruling Overturning Hedge Fund Fraud Convictions
Manhattan U.S. Attorney Preet Bharara will ask for a rehearing of an insider trading case in which convictions were overturned. In the case, United States v. Newman, A United States Court of Appeals for the Third Circuit panel overturned the convictions of Level Global Investors hedge fund portfolio manager Anthony Chiasson and Diamondback Capital hedge fund portfolio manager Todd Newman. The panel cited a 1983 Supreme Court precedent that said remote tippees could only be held liable if they knew the original tipper and received “personal benefit” from said tippee. This could not be proven against the two men so the court dismissed the cases against them.

“Remote tippees” in insider trading cases are people that find out about material nonpublic data via an intermediary and not straight from the insider that was the original source of the information.

Judge Vacates Insider Trading Guilty Pleas
Just this week, a federal judge vacated guilty pleadings by Thomas Conradt, Daryl Payton, Trent Martin, and David Weishaus. The four men pleaded guilty to trading on non-public data ahead of IBM’s agreement to purchase SPSS for $1.2 billion in 2009. A lawyer working on the deal gave them the information. He passed on the data to Martin but did not think that he would share the information with anyone else or use it for trading.

The men requested that their guilty pleas be withdrawn after the Second Circuit panel overturned the convictions of Chiasson and Newman. U.S. District Judge Andrew L. Carter Jr. granted their request.

Now, ex-Galleon Group trader Zvi Goffer is also saying that he will try to get his insider trading conviction, which came with a ten-year prison term, dismissed. Nicknamed the “Octopussy” while at that firm, Goffer is accused of having direct knowledge that tippers were benefiting and personally directing cash payments to them for giving over the material, non-public data.

U.S. regulators sue former Capital One employees for insider trading, Reuters, January 22, 2015

Insider trading convictions vacated, USA Today, January 22, 2015

Insider-Trading Defendants Allowed to Retract Guilty Pleas, The Wall Street Journal, January 22, 2015

More Blog Posts:
SEC Wants $602M Fund Set Up for Victims of SAC Capital’s Insider Trading, Stockbroker Fraud Blog, November 17, 2014

Ex-Ameriprise Manager Who Helped with SAC Capital Insider Trading Case Settles Charges Against Her, Institutional Investor Securities Blog, December 9, 2014

Texas State Securities Board Was Special Prosecutor in $1M Securities Fraud Case
, Stockbroker Fraud Blog, January 22, 2015

October 23, 2014

Rajaratnam Brother Settles Insider Trading Charges Involving Hedge Fund Advisory Firm Galleon Management

Rajarengan “Rengan” Rajaratnam, the brother of Raj Rajaratnam, has consented to pay over $840,000 to settle insider trading charges filed, against him by the U.S. Securities and Exchange Commission. Rengan, who has not admitted to or denied wrongding, also has agreed to an industry bar. A court must still approve the settlement.

Rengan was a portfolio manager at Galleon. He also co-founded Sedna Capital Management, which is another hedge fund advisory firm. Raj was convicted of insider trading in 2011.

It was in 2013 that the SEC filed charges against him for his involvement in the insider trading scam conducted by his brother Raj and Galleon Management.

According to the Commission from 2006 to 2008 Raj, who was a Galleon founder, repeatedly gave Rengan insider data. The latter made over $3 million in illicit gains for himself and the funds that he managed at Sedna Capital and Galleon. Rengan also purportedly worked with his brother to nurture highly-placed sources and obtain confidential information so that they would benefit over other traders. Some of his illicit trades are said to have involved securities of Hilton Hotels, Akamai Technologies, Polycom and others. Rengan, however, was acquitted in the criminal case against him.

The financial scheme involved securities in over 15 companies that resulted in illicit gains of close to $100 million. To date, the regulator has settled or obtained court order judgments in enforcement actions related to the Galleon fraud against 35 defendants. Some $165 million in monetary sanctions have resulted thus far.

Rajaratnam’s Brother Settles SEC Lawsuit for $841,000, Bloomberg, October 23, 2014

Rengan Rajaratnam's Prosecutors Had Concerns About the Case, The Wall Street Journal, July 9, 2014

Read the SEC Complaint Charging Rengan with Insider Trading (PDF)

More Blog Posts:
Galleon Group Founder’s Brother Pleads Not Guilty to Insider Trading, Institutional Investor Securities Blog, April 2, 2013

Ex-Goldman Sachs Board Member Accused of Insider Trading with Galleon Group Co-Founder Seeks to Have SEC Administrative Case Against Him Dropped, Institutional Investor Securities Blog, April 19, 2011

Galleon Group LLC Co-Founder Raj Rajaratnam Sentenced to 11 Years in Prison Over Insider Trading Scam, Stockbroker Fraud Blog, October 13, 2011

August 14, 2014

Former MIT Professor and His Son Plead Guilty to $140M Hedge Fund Fraud

Gabriel Bitran, an ex- Massachusetts Institute of Technology professor, and his son Marco Bitran have pled guilty to securities fraud charges accusing them of bilking investors of $140 million. Through their company, GMP Capital Management, the father and son placed investor money in hedge funds linked to Bernard Madoff, who ran the Ponzi scam that defrauded clients of billions of dollars.

According to prosecutors, from 2005 to 2011 Bitran and Marco collected $500 million from investors by promising to invest their funds using an original complex mathematical trading model. The money was supposed to go into exchange-traded funds and other securities but were instead placed in hedge funds.

When the financial crisis of 2008 happened, a number of the hedge funds got into trouble. Some of their investors lost up to 75% of their principal.

The Bitrans allegedly took out around $12 million of their own money from the hedge funds but made customers wait to redeem their funds from GMP Capital Management. (In 2011, the firm name was changed to Clearstream Investments LLC.) The two of them paid themselves millions of dollars in management fees.

The father and son are accused of lying to investors by telling them that they had delivered average yearly returns of 16-23% over eight years. The U.S. Attorney said that e-mails between the Britans show evidence of this. They also purportedly made false statements to the U.S. Securities and Exchange Commission during its related investigation.

In that civil probe, the Bitrans consented to settle the hedge fund fraud charges by paying $4.8 million. The two did not deny or admit wrongdoing. They did, however, agree to an industry bar.

If the judge accepts their plea deal in the criminal securities case, the Britans are facing up to five years behind bars and then supervised release. They would have to pay back $10 million in profits.

Ex-MIT official and son plead guilty to securities fraud, Boston.com, August 12, 2014

Ex-MIT dean, son plead guilty to hedge fund scam, CNN, August 12, 2014

More Blog Posts:

LPL Financial to Pay Illinois $2 Million Fine Related to Variable Annuity Exchanges, Stockbroker Fraud Blog, August 13, 2014

SEC Tells J.S. Oliver Capital to Pay $15M for Alleged Cherry-Picking Scam, Stockbroker Fraud Blog, August 11, 2014

Kansas Settles SEC Charges Over Allegations it Misled Investors about Risks in Muni Bond Offerings Totaling $273 Million, Stockbroker Fraud Blog, August 11, 2014

June 14, 2014

Hedge Fund Fraud News: Ex-Osiris Partners Principals Must Pay $55M, Ex-SAC Manager Gets Prison Sentence for Insider Trading, Lawyer Goes to Prison Over Rothstein Fraud, and Former New Stream Capital Executives Plead Guilty

NJ Court Orders Former Osiris Partners LLC Principals To Pay Over $55M
A state court in New Jersey has ordered the ex-principals of Osiris Partners LLC, Ex-CEO Michael J. Spak, ex-Chairman Peter Zuck, and ex-controller Joseph C. Spak to pay more than $55 million in penalties and restitution for hedge fund fraud. Investors were bilked when the men fraudulently inflated the firm’s net asset value and diverted funds for personal spending.

Prosecutors contend that the men overstated the net asset value of the hedge fund so that management fees would be higher and losses could be hidden. Unregistered agents were hired to sell limited partnership interests. By the latter part of 2011, the net asset value of the fund was nearly nil because of the inflated management fees, the misappropriation of the money, investor payments, and trading losses. Dozens of investors were harmed.

The New Jersey Division of Consumer Affairs and the Bureau of Securities were granted summary judgment in this case.

Ex-SAC Hedge Fund Manager Gets 3 ½ Year Prison Sentence
Michael Steinberg, a former SAC Capital portfolio manager, must serve 2 ½ years in prison for insider trading. Prosecutors said Steinberg traded on information from NVIDIA and Dell insiders and made almost $2 million in illegal profits. He was found guilty last year of conspiracy and securities fraud charges.

In April, SAC, owned by billionaire Steven Cohen, settled charges of wire fraud and securities fraud that involved “systemic insider trading” and let the firm garner hundreds of million dollars in illegal profits. A federal judge approved its $1.8 billion settlement with the government and SAC closed down its investment advisory business save for overseeing Cohen’s $9 billion wealth.

Lawyer Gets Prison Sentence for Helping Rothstein Fraud
Christina Kitterman, the ex-Rothstein Rosenfeldt Adler attorney, will serve five years in prison for impersonating a Florida Bar official. According to prosecutors, even though she didn’t know Scott Rothstein was running a $1.4 billion Ponzi scam, she knew it was fraud to impersonate Adria Quintela, the head of the bar’s office in Fort Lauderdale.

While pretending to be Quintela, she attempted to get some of Rothstein’s investors to keep giving him funds even though he didn’t make payments to them. The conversation allowed Rothstein’s Ponzi scam to continue for another six months when investors gave over another $553 million.

Rothstein, who is serving a 50-year prison term for the Ponzi scam, was an adjunct professor while Kitterman was a Nova Southeastern University law student. He later became her boss. She claims he was sometimes abusive but that she felt indebted to him after he helped her get into rehab for alcoholism.

Ex-New Stream Capital Hedge Fund Managers Plead Guilty to Securities Fraud
David Bryson, Bart Gutekunst, and Richard Pereira have pleaded guilty to conspiracy to commit wire fraud. The men were managers of the new defunct New Stream Capital hedge fund in Connecticut.

According to prosecutors, they hid changes they made to the fund’s capital structure to appease their Gottex Fund Management biggest investors when the market collapsed in 2008. They didn’t want Gottex to withdraw the almost $300 million it invested in New Stream. The Switzerland-based company had announced it was going to withdraw or redeem its investment because it was worried that changes made by New Stream management had subordinated the status of its investment.

New Stream then manipulated accounts outside the US to keep giving Gottex favorable treatment. According to the SEC, which filed a civil case, as the financial crisis got worse the New Stream executives wouldn’t let investors redeem or withdraw their money. They dealt with about $545 million in redemption requests. The hedge fund filed for bankruptcy protection three years ago.

Shepherd Smith Edwards and Kantas, LTD LLP
Our hedge fund fraud law firm represents individual investors and institutional investors. Contact our securities lawyers today.

Connecticut Hedge Fund Execs Admit Fraud, The Courant, May 22, 2014

Read the SEC Complaint (PDF)

Rothstein lawyer Christina Kitterman gets 5 years in federal prison for fraud, Sun-Sentinel, May 20, 2014

Default judgment worth $55M against Osiris Fund, Washington Examiner, June 9, 2014

Hedge Fund Manager Gets 3 Year Sentence for Insider Trading
, Time, May 16, 2014

More Blog Posts:

Ex-Sentinel CEO is Convicted of $500M Fraud, Stockbroker Fraud Blog, April 24, 2014

SEC Stops Former Marine’s Hedge Fund Fraud That Targeted Military Folk, Stockbroker Fraud Blog, August 12, 2013

SAC Capital Advisor’s $1.8B Criminal Securities Fraud Settlement with the DOJ is Accepted by a Federal Judge, Institutional Investor Securities Blog, April 12, 2014

April 24, 2014

Ex-Sentinel CEO is Convicted of $500M Fraud

Eric Bloom, the CEO of Sentinel Management Group, Inc., the now bankrupt hedge fund, has been convicted of bilking over 70 customers of more than $500 million prior to the firm’s collapse. According to the U.S. Department of Justice, Bloom misappropriated securities that belonged to customers when he used the financial instruments as collateral to get a loan for Sentinel from Bank of New York Mellon Corp. (BK). The loan was partially used to buy risky illiquid securities for a trading portfolio to benefit Bloom, other Sentinel officers, corporations controlled by his family, and his relatives.

Also, says the DOJ, even though Bloom knew that Sentinel was at risk of defaulting on the loan from the bank, he caused the hedge fund to take over $100 million from customers while hiding its true financial state. A federal jury returned guilty verdicts against him on one count of investment adviser fraud and 18 counts of wire fraud.

The guilty verdict comes six months after Charles K. Mosley, Sentinel’s former head trader, pleaded guilty to two counts of investment adviser fraud related to the charges filed against Bloom. Mosely admitted to covering up their actions. In his plea agreement, he said that customers were sent statements according to interest income rates that he and Bloom had calculated rather than the performance of investment portfolios.

The SEC sued Sentinel in 2007, accusing the firm of transferring at least $460 million in securities from client funds and using the holdings of customers to get a $321 million credit line. Rather than disclosing that Sentinel was moving, comingling, and misappropriating assets, says the SEC, the firm issued regular account statements that showed no indication of the improper activities. As a result customers of Sentinel suffered undisclosed losses for months until they got a letter from the firm saying that the assets would have to be sold at discount and at a loss, supposedly because of the liquidity crisis.

In August, an appeals court judge Chicago said that BNY Mellon would have to face a lawsuit challenging its $312 million lien on assets of Sentinel. This reversed a district judge’s decision to uphold the lien. (The liquidation trustee had sued BNY Mellon to subordinate or disallow its lien claiming bank employees were aware that Sentinel was wrongly using the assets of investors as collateral as part of the hedge fund’s credit line.) In January, U.S. Bankruptcy Judge Jacqueline P. Cox said that BNY Mellon would have to give back the $337 million it received from Frederick Grede, the trustee liquidating Sentinel.

If you suspect your investment losses are a result of negligence or misconduct at the financial firm representing you, please contact our securities fraud lawyers today.

US Justice Department Convicts Hedge Fund CEO Of $500 Million Fraud, HedgeCo.Net, March 26, 2014

BNY Mellon Must Face Challenge to $312 Mln Sentinel Lien, Bloomberg, August 26, 2013

Sentinel trustee wants Bank of NY Mellon to return $337 million, Reuters, December 18, 2013

More Blog Posts:
Securities Law Roundup: Ex-Sentinel Management Group Execs Indicted Over Alleged $500M Fraud, Egan-Jones Rating Wants Court to Hear Bias Claim Against SEC, and Oppenheimer Funds Pays $35M Over Alleged Mutual Fund Misstatements, Stockbroker Fraud Blog, June 13, 2012

Barclays Settles Two Libor-Related Securities Cases, Institutional Investor Securities Blog, April 16, 2014

Bank of America, JPMorgan Chase Among Banks Sued by Danish Pension Funds in Credit Default Swaps Lawsuit, Institutional Investor Securities Blog, August 15, 2013

February 28, 2013

New Stream Capital LLC Hedge Fund Executives Face Criminal Securities Fraud Charges

The United States has charged Bart Gutekunst, Richard Pereira, and David Bryson, all New Stream Capital LLC hedge fund executives, with securities fraud, wire fraud, and conspiracy. Pereira is New Stream’s former CFO. According to US Attorney David Fein, the defendants ran a securities scam to fool investors so they could get and keep up investments partially because they were afraid they would lose their largest fun investor.

New Stream unveiled new feeder funds in November 2007. It told investors they would have to transfer their investments from a Bermuda-based fund that they were closing to these new ones. However, contend prosecutors, when New Stream’s biggest investor, Gottex Fund Management, intended to redeem its investment in the fund in Bermuda rather than transfer its money to the newer funds, the New Stream executives allegedly came up with a scam to keep the fund going so that the redemption would be reversed.

They are accused of restructuring New Stream’s structure to make sure Gottex Fund Management was prioritized. 2011, the fund and its affiliates petitioned for bankruptcy protection when their multiple restructuring efforts failed. After the US Bankruptcy Court in Delaware approved the firm’s liquidation plan last year, the funds’ investors were able to recover 7 to 19% of their monies.

If convicted, the three men, who were released on bond, face up to 20 years behind bars on each of the 10 securities fraud counts and the eight wire fraud counts. In regard to the single conspiracy count, that comes with a maximum of five years behind bars if there is a conviction.

Meantime, the Securities and Exchange Commission has filed related Connecticut securities fraud charges against Gutenkunst, David Bryson, and New Stream Capital. The regulator contends that they lied to investors about their hedge fund’s financial state and capital structure. Also facing SEC securities charges are Pereira and the firm’s ex-investor relations head Tara Bryson, who has agreed to a proposed settlement.

The Commission claims that after the advisory firm’s co-owners and lead principals made the decision to modify the fund’s capital structure to appease Gottex by giving it priority over other investors should liquidation occur. Gutekunst and David Bryson, with Tara Bryson leading the way, allegedly kept marketing the fund to make it appears as if all investors were on equal ground. They are accused of fraudulently raising close to $50 million in investor money due to these alleged misrepresentations.

The Commission claims that not only would disclosing the capital structural changes have made it harder to keep raising money via the new feeder funds and caused existing investors to pull for redemptions, but also, disclosing this information would have negatively impacted the pecuniary interests of the defendants, while jeopardizing the growth in cash flow coming from a new, profitable fee structure that they had set up in 2011.

If you lost money because your investment was wrecked by securities fraud, contact our stockbroker fraud law firm right away and we will be happy to provide you with a free case evaluation.

SEC Charges Connecticut Hedge Fund Managers With Securities Fraud, SEC.gov, February 26, 2013

New Stream Capital Executives Accused of Fraud, The Wall Street Journal, February 26, 2013

More Blog Posts:

Ex-Hedge Fund Portfolio Managers Convicted in $72M Insider Trading Scams, Stockbroker Fraud Blog, January 1, 2013

Louisiana-Based Hedge Fund Manager Charged by SEC with Securities Fraud Related for Allegedly Concealing RMBS Losses, Stockbroker Fraud Blog, November 8, 2012

New York Fed Bailed Out Bank of America Over Mortgage-Backed Securities Sold to AIG, Institutional Investor Securities Blog, February 20, 2013

February 12, 2013

Securities Fraud Litigation Roundup: Former Hedge Fund Exec Admits to $1M Investment Fraud, SEC Files Penny Stock Scam Case& Class Action Claims Against Contact Lens Maker are Dismissed

Ex-Hedge Fund Exec Pleads Guilty to $1M Investment Fraud
In the U.S. District Court for the Southern District of New York, ex-hedge fund principal Berton Hochfeld pleaded guilty to wire fraud and securities charges over his alleged role in an investment scam that bilked investors of over $1M. He had been the organizer of limited liability Hochfield Capital, the general partner of Heppelwhite Fund LLP, which was set up to invest in publicly traded securities.

According to prosecutors, Hochfeld issued false representations to investors about the investments they made while misappropriating their money. He also is accused of taking money from Heppelwhite. Hochfeld will pay restitution and forfeit illegal profits. He will be sentenced this summer.

Securities and Exchange Commission Files Penny Stock Scam Case
The SEC is suing 12 entities and four individuals for allegedly running a penny stock scam that involved the acquisition of unregistered microcap company shares at discounted rates and then selling them while making false claims of registration exemptions per federal securities laws. Per the Commission, from 2007 to 2010 the defendants obtained unregistered shares in microcap companies at a discount of 30-60% by telling the companies that they wouldn’t resell the shares right away and instead keep them for investments when, actually, they did sell them immediately while making fraudulent claims that the shares were exempt from registration under the 1933 Securities Act’s Regulation D.

Actions allegedly taken included setting up virtual corporate presences in Texas and other states to make it appear as if compliance with claimed exemption was taking place and getting lawyer opinion letters that talked about the defendants’ intention to keep the shares for investment purposes. They also are also accused of using these letters to get stock certificates sans restrictive legends so they could resell the shares right away.

Class Action Securities Claims Against Contact Lens Maker are Dismissed
The U.S. District Court for the Northern District of California has dismissed a securities fraud class action lawsuit against Cooper Cos. Inc. (COO) and some of its former and current executives. The complaint had accused them of making false and misleading statements about “Avaira” contact lenses, which were defective, to raise the company’s share price. The executives also allegedly sold their company shares, making more than $14.2 million in illicit benefits. The plaintiffs are claiming 1934 Securities Exchange Act violations.

Noting that the lawsuit did not satisfy the Private Securities Litigation Reform Act’s pleading requirements and did not allege facts supporting that there was a “strong inference of scienter” or that the share price had become inflated due to omission or representation, the district court granted the defendants’ motion to dismiss.

Greenberg v. Cooper Cos. Inc. (PDF)

Securities and Exchange Commission v. Garber et al, Justia

United States v. Hochfeld (pdf)

More Blog Posts:
Texas Securities Criminal Case Against Oil and Gas Company Executive Can Proceed, Rules Fifth Circuit, Stockbroker Fraud Blog, February 6, 2013

Reviving Antifraud Lawsuit Over Alleged Market-Timing Practices From Over Five Years Ago is Not the Answer, Say Ex-SEC Officials, Institutional Investor Securities Fraud, December 22, 2012

Reviving Antifraud Lawsuit Over Alleged Market-Timing Practices From Over Five Years Ago is Not the Answer, Say Ex-SEC Officials, Institutional Investor Securities Fraud, December 22, 2012

January 1, 2013

Ex-Hedge Fund Portfolio Managers Convicted in $72M Insider Trading Scams

A jury has convicted Anthony Chiasson and Todd Newman, two ex-hedge fund portfolio managers, of securities fraud and conspiracy charges related to the parts they played in insider trading scams that caused them to illegally profit about $72M. Newman was previously with Diamondback Capital Management, LLC while Chiasson was with Level Global Investors, LP.

According to United States Attorney for the Southern District of New York Preet Bharara, the defendants made trades using insider information about NVIDIA Corporation (NVDA) and Dell Inc. (DELL). Research analysts at different investment firms gave them the material, nonpublic information.

Chiasson was found guilty of five counts of securities fraud. On just the two technology companies’ stocks, he had made Level Global $68.5 million. Newman, who made his fund approximately $3.8 million, was convicted of four securities fraud counts. Both men could spend years behind bars.

The massive insider trading operation ran from 2007 to 2009. Level Global, a $4 billion hedge fund, underwent liquidation 2011 following a 2010 FBI raid. Diamondback told its clients in December that it too was shutting down shop following similar raids.

Meantime, the research analysts accused of giving Chiasson and Newman the information have also pled guilty to related criminal charges: Jon Horvath, previously with Sigma Capital Management; Jesse Tortora, also previously with Diamondback and who had worked under Newman; Danny Kuo, formerly with Trust Company; Sandeep Goyal, formerly with Neuberger Berman; Spyridon Adondakis, who had worked at under Chiasson at Level Global. Tortora, Goyal and Adondakis were cooperating witnesses that testified in this latest criminal trial.

Operation Perfect Hedge
The investigation and prosecution of these men are part of Operation Perfect Hedge, which is the name given to the FBI’s systematic efforts to target insider trading involving hedge funds. Since October 2009, Bharara’s office has charged 79 people with insider trading—71 of them have either been convicted or they entered guilty pleas.

Two Former Portfolio Managers Found Guilty In Manhattan Federal Court Of Insider Trading Schemes That Netted More Than $72 Million In Illegal Profits, The United States Attorney's Office, Southern District of New York, December 17, 2012

Hedge Fund Managers Convicted of Insider-Trading Scheme, Bloomberg, December 18, 2012

More Blog Posts:
$78M Insider Trading Scam: "Operation Perfect Hedge” Leads to Criminal Charges for Seven Financial Industry Professionals, Stockbroker Fraud Blog, January 18, 2012

Texas Securities Fraud: SEC Charges Life Partners Holdings Inc. in Life Settlement Scam, Stockbroker Fraud Blog, January 4, 2012

Insider Trading: Former FrontPoint Partners Hedge Fund Manager Pleads Guilty to Criminal Charges, Institutional Investor Securities Blog, August 20, 2011

Continue reading "Ex-Hedge Fund Portfolio Managers Convicted in $72M Insider Trading Scams" »

November 8, 2012

Louisiana-Based Hedge Fund Manager Charged by SEC with Securities Fraud Related for Allegedly Concealing RMBS Losses

The Securities and Exchange Commission has filed charges against hedge fund manager Walter A. Morales and his Baton Rouge-based firm Commonwealth Advisors with allegedly defrauding investors by concealing the millions of dollars in losses sustained from investments linked to residential mortgage-backed securities during the economic crisis. The SEC wants a jury trial and it is seeking permanent enjoinment, penalties, disgorgement, and prejudgment interest.

According to the Commission's RMBS lawsuit, Morales and his financial firm caused the hedge funds that they oversaw to purchase Collybus, which were the most risky and lowest tranches of a collateralized debt obligation. They then sold MBS into the CDO at prices they had received four months prior while being fully aware that during this time the RMBS market had declined. As the CDO investments continued to not do well, Morales allegedly told firm employees to engage in cross-trades by conducting manipulative trades with the hedge funds they advised so that a $32 million loss sustained by one of the funds in the Collybus investment could be hidden. Morales and his firm then allegedly lied to investors, which included individuals and pension funds, about the worth and quantity of the mortgage-backed assets in the funds and created bogus internal documents so that their false valuations could be justified.

Also, even though Morales and Commonwealth likely knew that the losses would continue for some time, the SEC contends that the two of them conducted over 150 cross-trades between two hedge funds they provided advice to and another one of their hedge funds at prices under Commonwealth’s valuation for those securities in June 2008. After the trades were made, Morales is said to have instructed an employee to designate the securities as having fair market value, creating a $19 million gain for the acquiring hedge fund that was fraudulent and at cost to the funds that were sold. The cross-trades were conducted even though Morales had represented that it would not make such trades.

The SEC also claims Morales deceived a prime brokers by representing the transactions as legitimate and at current market prices, as well as its largest investor by misrepresenting the latter’s exposure to the CDO. Although he had promised that the investor’s exposure to Collybus would be limited, by the middle of 2008 its exposure was almost double. Morales also allegedly made up false minutes after the investor found out that Commonwealth was not going along with its valuation procedures that it had stated.

SEC Charges Baton Rouge-Based Investment Adviser with Hiding Losses From Mortgage-Backed Securities Investments, SEC, November 8, 2012

Read the SEC Complaint (PDF)

More Blog Posts:
Wells Fargo Securities Settles for Over $6.5M SEC Charges Over Allegedly Improper Sale of ABCP Investments with Risky MBS and CDOs, Institutional Investor Securities Blog, August 14, 2012

Harbinger Capital Partners LLC and Hedge Fund Adviser Philip A. Falcone Face SEC Securities Charges Over Client Asset Misappropriation and Market Manipulation Allegations, Institutional Investor Securities Blog, June 29, 2012

Securities Lawsuit Against Options Clearing Corporation and Chicago Board Options Exchange Can Proceed Says Illinois Appellate Court, Stockbroker Fraud Blog, August 24, 2012

Continue reading "Louisiana-Based Hedge Fund Manager Charged by SEC with Securities Fraud Related for Allegedly Concealing RMBS Losses " »

August 24, 2012

Securities Lawsuit Against Options Clearing Corporation and Chicago Board Options Exchange Can Proceed Says Illinois Appellate Court

In a divided 2-1 ruling, the Illinois Appellate Court has decided that Platinum Partners Value Arbitrage Fund LP can sue the Chicago Board Options Exchange and the Options Clearing Corporation for allegedly telling certain traders about a downward adjustment made to the price of certain mutual fund options. The ruling reverses a lawyer court’s decision and concludes that the two SROs did not act in a regulatory capacity when they privately revealed this information to certain John Doe defendants before the news was made public.

Platinum Partners Value Arbitrage Fund, which is a hedge fund, contends that in late 2010, it bought 50,000 India Fund Inc. (IFN) options from the John Does. Soon after, Options Clearing Corporation and Chicago Board Options Exchange decided to downgrade the India Fund's series option contracts strike price by $3.78. An employee at one of the SRO’s allegedly told certain market participants about this adjustment before the public was notified.

The hedge fund then proceeded to file a securities fraud lawsuit against Chicago Board Options Exchange and Options Clearing Corp. accusing them of Illinois statutory and common law violations, while contending that they caused it to suffer harm because it bought the IFN options right before the price adjustment was publicly disclosed. The two organizations countered that as SROs, they were immune from such lawsuits. The lower court agreed with their claim of immunity.

The appellate court, however, disagrees. In his majority opinion, Circuit Judge Robert E. Gordon stressed that SROs are not completely immune from lawsuits and that absolute immunity only stands when the alleged conduct in question is one that is a disciplinary, regulatory, or quasi-governmental prosecutorial function. The court noted that while the plaintiff acknowledged that the decision to change IFN’s strike price was a regulatory one, how the change was disclosed—early and in in private to the John Doe defendants—wasn’t and didn’t serve a purpose that was governmental or regulatory. Seeing as SROs, in addition to fulfilling quasi-governmental duties also have a for-profit business that is private, the court found that when the private disclosure was made to the John Doe defendants, Chicago Board Options Exchange and Options Clearing Corp. were behaving in a “private capacity and for their own corporate benefit.” As a result, the non-public notification to the John Doe defendants cannot be considered conduct under the 1934 Securities Exchange Act’s delegated authority and therefore “cannot be protected by the doctrine of regulatory immunity.”

Judge Gordon also determined that Platinum Partners did a sufficient job of stating a claim, under the Illinois Consumer Fraud Act, that disclosing the price adjustment in private was a “material omission and a deceptive act” by the two SROs. The hedge fund claimed that the two organizations meant for the rest of the market to depend on the fact that the information hadn’t been already privately disclosed to anyone. The judge said that the deception occurred during commerce and trade and was the proximate cause of damage to the plaintiff.

Platinum Partners Value Arbitrage Fund LP v. Chicago Board Options Exchange, Ill. App (PDF)

Chicago Board Options Exchange

The Options Clearing Corporation

More Blog Posts:
Goldman Sachs Ordered by FINRA to Pay $650K Fine For Not Disclosing that Broker Responsible for CDO ABACUS 2007-ACI Was Target of SEC Investigation, Stockbroker Fraud Blog, November 12, 2010

Harbinger Capital Partners LLC and Hedge Fund Adviser Philip A. Falcone Face SEC Securities Charges Over Client Asset Misappropriation and Market Manipulation Allegations, Institutional Investor Securities Blog, June 29, 2012

Montford Associates to Pay $650,000 in Securities and Exchange Commission Penalties Over Failure to Disclose Payments from Hedge Fund, Institutional Investor Securities Blog, May 1, 2008

Continue reading "Securities Lawsuit Against Options Clearing Corporation and Chicago Board Options Exchange Can Proceed Says Illinois Appellate Court" »

November 12, 2011

Hedge Fund Manager Raj Rajaratnam Ordered by SEC to Pay $92.8M Penalty for Insider Trading

In the U.S. District Court for the Southern District of New York, the Honorable Jed S. Rakoff has ordered Raj Rajaratnam to pay a record $92.8 million penalty for insider trading. This is the largest amount any individual has been ordered to pay for this type of securities fraud.

It was just last month that Rajaratnam, the billionaire Galleon Group, LLC co-founder, was sentenced to 11 years in prison and ordered to pay $10 million for his financial scam that garnered $63.8M in illegal gains. He also was forced to forfeit $53.8M. A jury had convicted Rajaratnam of multiple counts of securities fraud and conspiracy for using illegal tips to make trades before news about mergers, earnings, forecasts, and spinoffs became public.

Along with the fines from the criminal case, the penalty for the civil case ups the total of monetary sanctions that Rajaratnam has been ordered to pay to over $156.6 million. The SEC’s civil action also permanently enjoins him from violating sections of the Securities Act of 1933, the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5.

It was in 2009 that the SEC charged Rajaratnam and several others in the insider trading scam. More defendants were named later that year, as well as in 2010. The case against them was part of a wider insider trading probe that has now charged 29 entities and individuals. Securities in over 15 publicly traded companies were involved resulting in more than $90 million in illicit profits or losses avoided.

Last month, the SEC was able to get a final judgment by consent against Galleon Management. The hedge fund is permanently enjoined from violating the federal securities laws’ antifraud provisions. It is also jointly and severally liable for what Rajaratnam has been ordered to pay.

Also in October, the SEC charged Rajat K. Gupta for providing insider trading tips to Rajaratnam. Gupta, who used to be the global head at McKinsey & Co., was on the boards of Procter and Gamble and Goldman Sachs at the time.

Alleged tips included confidential information about P & G and Goldman’s respective quarterly earnings and a $5 million investment that the latter was planning to make in Berkshire Hathaway. These latest charges come now, after the SEC dismissed charges in an earlier administrative proceeding against Gupta for the same alleged misconduct. Gupta also recently pleaded not guilty to insider trading charges, including multiple counts of securities fraud and one count of conspiracy to commit securities fraud.

The New York Times reports that in the last two years, the US government charged 56 people with insider trading. 51 of these individuals have either been convicted or pleaded guilty.

With Gupta’s Arrest, Insider Inquiry Goes Beyond Wall St., NY Times, October 26, 2011

SEC Brings New Charges against Raj Rajaratnam, SEC, October 26, 2011

More Blog Posts:
Galleon Group LLC Co-Founder Raj Rajaratnam Sentenced to 11 Years in Prison Over Insider Trading Scam, Stockbroker Fraud Blog, October 13, 2011

Ex-Goldman Sachs Board Member Accused of Insider Trading with Galleon Group Co-Founder Seeks to Have SEC Administrative Case Against Him Dropped, Institutional Investor Securities Blog, April 19, 2011

Ex-Goldman Sachs Director Rajat Gupta Pleads Not Guilty to Insider Trading Charges, Stockbroker Fraud Blog, October 26, 2011

Continue reading "Hedge Fund Manager Raj Rajaratnam Ordered by SEC to Pay $92.8M Penalty for Insider Trading " »

October 13, 2011

Galleon Group LLC Co-Founder Raj Rajaratnam Sentenced to 11 Years in Prison Over Insider Trading Scam

Raj Rajaratnam, a billionaire investor and co-founder of Galleon Group LLC, has been ordered to pay a $10 million fine and serve 11 years in jail for his key role in an insider trading scam that resulted in $63.8M in illegal profits. He must now forfeit $53.8M.

A jury had found the hedge fund tycoon guilty of nine counts of securities fraud and five counts of conspiracy. Rajaratnam would obtain illegal tips from bankers, executives, traders, consultants, and directors of public companies (Goldman Sachs is one). He would then use that insider information to make trades prior to public announcements about mergers, forecasts, earnings, and spinoffs involving a number of companies, including Hilton Hotels, Integrated Circuit, Akamai, and Xilinix)

Rajaratnam’s attorneys are planning to appeal. For now, however, they are requesting that he be confined at the Butner Federal Correctional Complex, which is where Bernard Madoff is in jail. Madoff was sentenced to 150 years behind bars for his multibillion-dollar Ponzi scam.

Rajaratnam, who is originally from Sri Lanka was educated in England and the US. He established the Galleon hedge fund in the 1990’s and it became one of the biggest in the world. In 2008, Galleon was managing about $7 billion.

Federal securities investigators began to suspect trouble when, in the Rajaratnam gave the SEC documents for another investigation into the activities of his younger brother—no charges were ever brought t here—a text message was included from an ex-Intel Corp. employee warning to hold off on purchasing Polycom’s stock. The former employee, Rommy Khan, was already suspected of giving out insider information.

In 2007, Khan consented to help the authorities with their probe. He and several others served as cooperating witnesses that helped the government convict Rajaratnam, who was arrested in 2009.

The 11-year sentence against him is shorter than the 24 years and five months that prosecutors wanted. That said, it is still the longest prison sentence ever issued for insider trading.

Still under investigation in connection with the scam is Rajat Gupta, who used to work as a Goldman Sachs director. According to the Wall Street Journal and Bloomberg, criminal charges against him seem likely. Prosecutors consider him a “co-conspirator” in the insider trading case against Rajaratnam.

The SEC, which dropped its civil administrative proceeding against Gupta, plans to refile its charges in federal court. Meantime, Kamal Ahmed, who was also linked to the insider trading scam, has been fired by Morgan Stanley because he had disclosed confidential information. The government has not accused him of wrongdoing.

The SEC also filed a number of securities lawsuits against at least two dozen individuals and businesses in light of the Galleon investigation.

Trader Draws Record Sentence, The Wall Street Journal, October 14, 2011

U.S. Prosecutors ‘Close to Charging’ Rajat Gupta, Bloomberg, September 20, 2011

Accused Rajaratnam Tipster Fired By Morgan Stanley, FIN Alternatives, October 7, 2011

More Blog Posts:
Ex-Goldman Sachs Board Member Accused of Insider Trading with Galleon Group Co-Founder Seeks to Have SEC Administrative Case Against Him Dropped, Institutional Investor Securities Blog, April 19, 2011

A Texan is Among Those Arrested in Insider Trading Crackdown Involving Apple Inc., Dell, and Advanced Micro Devices' Confidential Data, Stockbroker Fraud Blog, December 16, 2010

3 Hedge Funds Raided by FBI in Insider Trading Case, Stockbroker Fraud Blog, November 23, 2010

Continue reading "Galleon Group LLC Co-Founder Raj Rajaratnam Sentenced to 11 Years in Prison Over Insider Trading Scam" »

August 3, 2011

Accused Texas Ponzi Scammer May Have Defrauded Investors of $2M

An El Paso man accused of running a Texas Ponzi scheme may in fact be a man who was convicted of fraud in Maryland more than 10 years ago. Scott Lindemann is now charged with wire fraud for allegedly defrauding at least 25 investors of $2 million.

Prosecutors say that Lindemann’s real name may actually be Scott Yermish, who left Maryland after serving time in jail. He left the state without finishing his probated time for a theft conviction.

It is in El Paso that Lindemann is accused of using his hedge fund to set up his Texas securities fraud scam. Per court records, he gained the trust of one person, who then assisted him in bringing in more investors. Lindemann allegedly gave some of the investors money so they would think they’d earned a profit. He also generated bogus documents that caused them to believe that their investments had grown substantially.

According to the San Antonio Express-News, one victim of the alleged Texas securities fraud says that she and her husband lost over $250,000. She also claims that other investors took out mortgages on their houses to invest with Lindemann.

The FBI is calling this a “quick investigation.” Lindemann was arrested a week after the complaint was made.

Ponzi Scam
This type of investment fraud generally involves investors receiving purported returns except that the money they are "making" is actually from new investors who think that these funds are being invested. To keep the scheme going, new investors must keep joining up so that scammers can use their money to pay the earlier-stage investors. Ponzi scams can collapse when too many investors ask to cash out or bringing in new investors starts to prove challenging.

Every year, there are investors that lose money because they placed their money in a Ponzi scam. Fortunately, there may be a way to recoup your losses. It is important that you speak with a Texas securities fraud law firm about your case.

Warning Signs that You May Be Investing in a Texas Ponzi Scheme:
• Watch out for “guaranteed” investment opportunities or the promise of high investment returns with little or no risk.
• Returns are too consistent. It is natural for investment returns to go up and down—especially if there is the hope of high returns.
• The investment that isn’t registered with the state or the SEC.
• The investment professional you are working with isn’t registered or licensed.
• The investment strategy involved is too complex for you to understand or you can’t get complete information about it.
• There isn't enough information about your investment that can be found in writing.
• Account statement errors.
• You aren’t getting promised payments.
• Cashing out on your investment is proving to be a challenge.
• Your financial adviser tries to get you to “roll over” payments that are owed to you with the promise of even higher returns.

Many Ponzi scam victims have lost their life savings, retirement, and/or kids’ college fund because they placed their trust and their money in the hands of the wrong people.

Related Web Resources:

Man arrested by FBI may have scammed millions, San Antonio Express-News, August 2, 2011

Accused Texas Ponzi Schemer May Be Fugitive Md. Fraudster, FinAlternatives, August 3, 2011

Ponzi Scams, SEC

Ponzi Scams, FBI

More Blog Posts:

Houston Securities Fraud: Ex-Citigroup Broker Accused of Stealing Millions from Wealthy Mexican Investors is Barred from FINRA, Stockbroker Fraud Blog, July 29, 2011

Basketball Benefactor Accused of Texas Securities Fraud and Ponzi Scam that Targeted High-Profile Coaches Found Dead, Stockbroker Fraud Blog, July 19, 2011

Venezuelan Workers Fall Victim to Francisco Illarramendi's Ponzi Scam, Stockbroker Fraud Blog, March 30, 2011

Continue reading "Accused Texas Ponzi Scammer May Have Defrauded Investors of $2M" »

June 23, 2011

“Poohster” Consultant Found Guilty of Insider Trading

Winifred Jiau, a Fremont, California consultant, has been convicted of insider trading and conspiracy. The network consultant was accused of selling technology company secrets to hedge fund traders for hundreds of thousands of dollars. The trial against Jiau was the first one involving an expert network firm. Primary Global Research in Mountain View employed her.

Expert networks reportedly connect hedge fund mangers and “consultants,” who are usually insiders at publicly traded companies, for a price. At least seven people linked to PGR have been charged with insider trading crimes.

According to Manhattan US Attorney Preet Bharara, Winnie Jiau exploited friends at public companies so she could get and then sell insider information. Noah Freeman, the government’s central witness and an ex- SAC Capital Advisors hedge fund portfolio manager who has pleaded guilty to his involvement, testified that she gave him illegal stock tips. He says that not only did he and his co-conspirators pay her $120,000 annually, but also she expected them to give her presents, which included iPhones, gift certificates, and lobsters. Those who paid her off received reaped substantial rewards. One hedge fund manager says that the tips he received were usually more “accurate” and “detailed” than any source and that the insider information allowed him to make $5 million to $10 million.

Some of Jiau’s hedge fund clients reportedly called her “the Poohster” after Winnie the Pooh, the fictitious bear that is always looking for a honey pot. Also, she reportedly used the code word “sugar” in emails and instant messages to refer to her payoffs. She called her tipsters “cooks" and her tips “recipes.”

Related Web Resources:
Expert Network Consultant is Convicted in Insider Trading Case, NY Times, June 20, 2011

Bay Area inside trader, Winifred Jiau, convicted, SF Gate, June 21, 2011

More Blog Posts:

Day Trader Pleads Guilty to Securities Fraud Charges Related to Insider Trading Scam, Stockbroker Fraud Blog, May 25, 2011

Motion to Dismiss SEC Lawsuit Accusing Dallas Billionaire Brothers of $500,000 Securities Fraud Denied, Stockbroker Fraud Blog, April 1, 2011

Guilty Plea for Financial Adviser Who Used UBS Tips in $1M Healthcare Insider Trading Scheme, Stockbroker fraud Blog, January 28, 2011

Continue reading "“Poohster” Consultant Found Guilty of Insider Trading" »

February 21, 2011

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

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

February 2, 2011

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

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:
SEC Accuses Fontana Capital of Breaching Short-Sale Restrictions, Bloomberg, January 7, 2011

Hedge fund manager faces SEC allegations, Boston.com, January 8, 2011

Read the SEC's administrative order (PDF)

Continue reading "Fontana Capital LLC Founder Violated Short-Selling Rule, Says SEC" »

November 23, 2010

3 Hedge Funds Raided by FBI in Insider Trading Case

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 "3 Hedge Funds Raided by FBI in Insider Trading Case" »

October 5, 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

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.

Related Web Resources:
SEC Charges Dallas-Based Hedge Fund Adviser for Participating in Stock Offerings After Selling Short, SEC.gov, September 23, 2010

SEC Order Against Carlson Capital L.P. (PDF)

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 " »