FROM: SECURITIES AND EXCHANGE COMMISSION
SEC Announces Charges and Asset Freeze Against Hedge Fund Advisory Firm Distributing Falsified Performance Results
The Securities and Exchange Commission filed fraud charges and sought emergency relief on May 5, 2014, against a New York-based investment advisory firm and two executives for distributing falsified performance results to prospective investors in two hedge funds they managed.
The SEC's complaint filed in U.S. District Court for the Southern District of New York alleges that Aphelion Fund Management, LLC's (Aphelion) chief investment officer Vineet Kalucha fraudulently altered an outside audit firm's report reviewing the performance of an investment account he managed. Aphelion's chief financial officer George Palathinkal allegedly learned about Kalucha's falsifications, which essentially changed an investment loss into a major investment gain in the account. Nevertheless, the falsified report showing the phony gain instead of the actual loss was distributed to prospective investors. Furthermore, investors were separately provided false information about Aphelion's assets under management and Kolucha's litigation history.
Kalucha, who is majority owner and managing partner of the firm in addition to chief investment officer, also is charged with siphoning investor proceeds for his luxury car payments and settlements of legal actions against him personally that are unrelated to Aphelion.
In response to the SEC's request for emergency relief for investors, U.S. District Court Judge Jed S. Rakoff issued a temporary restraining order, imposed an asset freeze to protect client assets, and temporarily prohibited the defendants from soliciting new investors or additional investments from existing investors. A hearing on the SEC's motion for a preliminary injunction has been scheduled for May 15 before Judge Richard M. Berman.
According to the complaint, Aphelion serves as the investment adviser and general partner for two unregistered hedge funds: Aphelion US Fund LP and Aphelion Offshore Fund Ltd. Kalucha has been managing investor funds since 2009 using a proprietary investment model that he developed. The outside auditor's report showed an investment loss of more than 3 percent during a 15-month period in an account that Kalucha managed. However, the fraudulent report distributed to investors showed a phony investment gain of 30 percent during an 18-month period. In addition to distributing the altered report, Aphelion, Kalucha, and Palathinkal also misled investors about Aphelion's assets under management. While Kalucha and Palathinkal told investors at various times during 2013 that Aphielion had $15 million or more in assets under management, the firm never had more than $5 million in assets under management at any point during that year.
The complaint further alleges that the defendants misrepresented Kalucha's litigation history to investors. Under the legal proceedings section in a due diligence questionnaire included in Aphelion's marketing materials, Kalucha answered "None" and added a lengthy, materially misleading explanation of a civil proceeding in which he was involved. The proceeding, which he did not identify by name, was a case against him by the U.S. Department of Labor for breaching fiduciary duties. By virtue of a consent judgment in the case, Kalucha and Aphelion are prohibited from acting as investment advisers to many types of common retirement plans, which often invest in hedge funds. Investors were deprived of this information in the due diligence questionnaire.
According to the complaint, Aphelion, Kalucha, and Palathinkal raised $1.5 million in investments for Aphelion from 2013 to March 2014 by representing to investors that the funds would be used for Aphelion's operating expenses. Kalucha actually used more than 40 percent of the funds raised in 2013 for his personal benefit. He has withdrawn investor proceeds for such things as settlement of a foreclosure action involving his personal residence, settlement of a breach of contract action filed against him in his personal capacity, down payment of a luxury BMW sedan, and payment for tax and accounting services for his personal finances. Palathinkal approved all of Kalucha's withdrawals. The complaint alleges that Aphelion, Kalucha, and Palathinkal violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In addition, the complaint alleges that Aphelion and Kalucha violated Sections 206(1), (2) and (4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder and that Palathinkal aided and abetted these violations.
The SEC's investigation and litigation have been conducted by David Benson, Paul Montoya, Eric Phillips, Delia Helpingstine, Kristine Rodriguez, and Joan Price-McLaughlin of the Chicago Regional Office.