SEC ANNOUNCES FRAUD CHARGES AGAINST HEDGE FUND INVOLVED WITH TERMINALLY ILL PATIENTS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

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Hedge Fund Manager Charged in Scheme Involving Terminally Ill

FOR IMMEDIATE RELEASE

2016-162

Washington D.C., Aug. 15, 2016 — The Securities and Exchange Commission today announced fraud charges against a hedge fund manager and his firm accused of paying terminally ill individuals to use their names on purportedly joint brokerage accounts so he could purchase investments on behalf of his hedge fund and redeem them early by invoking a survivor’s option.
An SEC examination of investment advisory firm Eden Arc Capital Management uncovered the scheme alleged by the SEC Enforcement Division in an order instituted today.  Donald Lathen of New York City allegedly used contacts at nursing homes and hospices to identify patients with less than six months to live, and he successfully recruited at least 60 of them by paying $10,000 apiece to use their names on accounts.  When a patient died, Lathen allegedly redeemed investments in the accounts by falsely representing to issuers that he and the terminally ill individuals were joint owners of the accounts.  Lathen’s hedge fund was the true owner of the survivor’s option investments.  Issuers paid out more than $100 million in early redemptions as a result of the alleged misrepresentations and omissions by Lathen and Eden Arc Capital.

The SEC Enforcement Division further alleges that Lathen violated the custody rule by failing to properly place the hedge fund’s cash and securities in an account under the fund’s name or in an account containing only clients’ funds and securities, under the investment adviser’s name as agent or trustee for the client.

“We allege that Lathen deceived issuers by falsely claiming that he and the deceased jointly owned the bonds when the hedge fund was the true owner of the investments,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “Lathen allegedly put hedge fund client assets at risk by keeping them in accounts in his and the terminally ill individuals’ names rather than following the custody rule.”

The SEC Enforcement Division alleges that Lathen, Eden Arc Capital Management, and Eden Arc Capital Advisors 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.  The Enforcement Division further alleges that Eden Arc Capital Management violated Section 206(4) of the Advisers Act and Rule 206(4)-2, and Lathen aided and abetted and caused those violations.

The matter will be scheduled for a public hearing before an administrative law judge, who will prepare an initial decision stating what, if any, remedial actions are appropriate.

The SEC’s investigation was conducted by Janna Berke, Judith Weinstock, Frank Milewski, Adam Grace, and Michael Birnbaum.  The case was supervised by Lara Shalov Mehraban and the litigation will be led by Alexander Janghorbani, Ms. Weinstock, and Ms. Berke.  The SEC examiners who detected the wrongdoing during the examination of Eden Arc Capital Management are Kathleen Raimondi, Lawrence Chinsky, and George DeAngelis.

SEC CHARGES INVESTMENT ADVISORY FIRM, OWNERS WITH INFLATING SECURITIES' PRICES IN HEDGE FUND

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

07/01/2015 10:30 AM EDT

The Securities and Exchange Commission charged a Greenwich, Conn.-based investment advisory firm and its two owners with fraudulently inflating the prices of securities in hedge fund portfolios they managed.

An SEC investigation found that AlphaBridge Capital Management told investors and its auditor that it obtained independent price quotes from broker-dealers for certain unlisted, thinly-traded residential mortgage-backed securities.  AlphaBridge instead gave internally-derived valuations to broker-dealer representatives to pass off as their own.  The inflated valuation of these assets caused the funds to pay higher management and performance fees to AlphaBridge.

AlphaBridge and its owners Thomas T. Kutzen and Michael J. Carino agreed to pay $5 million combined to settle the charges.

“The integrity of the portfolio valuation process is critical to fund investors, especially when it involves illiquid securities,” said Julie M. Riewe, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.  “AlphaBridge claimed to use market-grounded price quotes from brokers when in fact it relied on its own rosy view of market conditions to price its portfolio.”

The SEC separately charged Richard L. Evans, who lives in Houston, for assisting in the pricing scheme while working as a broker-dealer representative.  Evans, who cooperated with the SEC’s investigation, agreed to pay a $15,000 penalty and be barred from working in the securities industry for at least one year to settle charges that he aided and abetted and caused violations by AlphaBridge.  Evans neither admitted nor denied the findings.

According to the SEC’s orders instituting settled administrative proceedings, AlphaBridge also misled the funds’ auditor during two year-end audits by suggesting that Evans independently generated data to support AlphaBridge’s prices.  Carino actually developed the data himself.

The SEC’s order finds that AlphaBridge violated and Kutzen and Carino aided and abetted and caused violations of the antifraud and other provisions of the Investment Advisers Act of 1940. AlphaBridge, Kutzen, and Carino consented to the entry of the SEC’s order without admitting or denying the findings.  AlphaBridge and Kutzen are censured and Carino is barred from working in the securities industry for at least three years.  AlphaBridge will return more than $4 million in disgorgement and nearly $1 million in penalties to compensate for the funds’ overpayment of management and performance fees, and the firm will then close down the funds.

The SEC’s investigation was conducted by staff in the Asset Management Unit and Boston Regional Office, including Robert Baker, Brian Fitzpatrick, Patrick Noone, Naomi Sevilla, and Kathleen Shields.  The examination that led to the investigation was conducted by Lily Chan-Sann, Michael McGrath, and Di Tu.  The SEC appreciates the assistance of the Bermuda Monetary Authority as well as the New Orleans office of the Financial Industry Regulatory Authority and the Boston office of the U.S. Department of Labor’s Employee Benefits Security Administration.

SEC CHARGES FORMER ANALYST OF INSIDER TRADING

FROM:  SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today charged a former analyst at an affiliate of hedge fund advisory firm S.A.C. Capital Advisors with insider trading based on nonpublic information that he obtained about a pair of technology companies.

The SEC alleges that Ronald N. Dennis got illegal tips from two friends who were fellow hedge fund analysts.  They provided him confidential details about impending announcements at Dell Inc. and Foundry Networks.  Armed with inside information, Dennis prompted illegal trades in Dell and Foundry stock and enabled hedge funds managed by S.A.C. Capital and affiliate CR Intrinsic Investors to generate illegal profits and avoid significant losses.

Dennis, who lives in Fort Worth, Texas, has agreed to be barred from the securities industry and pay more than $200,000 to settle the SEC’s charges.

“Like several others before him at S.A.C. Capital and its affiliates, Dennis violated the insider trading laws when he exploited confidential information about public companies, in this case Dell and Foundry, to unjustly benefit the firms and enrich himself,” said Sanjay Wadhwa, senior associate director of the SEC’s New York Regional Office.  “His actions have cost him the privilege of working in the hedge fund industry ever again.”

According to the SEC’s complaint filed in federal court in Manhattan, Dennis received illegal tips about Dell’s financial performance from Jesse Tortora, who was then an analyst at Diamondback Capital.  Tortora and Diamondback were charged in 2012 along with several other hedge fund managers and analysts as part of the SEC’s broader investigation into expert networks and the trading activities of hedge funds.  Dennis separately received an illegal tip about the impending acquisition of Foundry from Matthew Teeple, an analyst at a San Francisco-based hedge fund advisory firm.  The SEC charged Teeple and two others last year for insider trading in Foundry stock.

The SEC alleges that Dennis caused CR Intrinsic and S.A.C. Capital to trade Dell securities based on nonpublic information in advance of at least two quarterly earnings announcements in 2008 and 2009.  Dennis obtained confidential details from Tortora, who had obtained the information from a friend who communicated with a Dell insider.  Dennis enabled hedge funds managed by CR Intrinsic and S.A.C. Capital to generate approximately $3.2 million in profits and avoided losses in Dell stock.  Within minutes after one of the Dell announcements, Tortora sent an instant message to Dennis saying “your welcome.”  Dennis responded “you da man!!! I owe you.”

The SEC’s complaint also alleges Dennis was informed by Teeple in July 2008 about Foundry’s impending acquisition by another technology company.  Shortly after receiving the inside information, Dennis caused a CR Intrinsic hedge fund to purchase Foundry stock and generate approximately $550,000 in profits when the news became public.

The SEC’s complaint charges Dennis with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and Section 17(a) of the Securities Act of 1933.  Dennis has agreed to pay $95,351 in disgorgement, $12,632.34 in prejudgment interest, and a $95,351 penalty.  Without admitting or denying the allegations, Dennis also has agreed to be permanently enjoined from future violations of these provisions of the federal securities laws.  The settlement is subject to court approval.  He would then be barred from associating with an investment adviser, broker, dealer, municipal securities dealer, or transfer agent in a related administrative proceeding.

The SEC’s investigation, which is continuing, has been conducted by Michael Holland, Daniel Marcus, and Joseph Sansone of the Enforcement Division’s Market Abuse Unit in New York and Matthew Watkins, Diego Brucculeri, James D’Avino, and Neil Hendelman of the New York Regional Office.  The case has been supervised by Sanjay Wadhwa.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.

SEC-HEDGE FUND SETTLES FRAUDULENT OFFER TO BUY WINNEBAGO INDUSTRIES COMMON STOCK

FROM:  SECURITIES AND EXCHANGE COMMISSION 
SEC Files Settled Securities Fraud Charges Against Alexander H.G. Mascioli and His Purported Hedge Fund, North Street Capital, LP

The Securities and Exchange Commission today filed settled fraud charges in the United States District Court for the District of Connecticut against Alexander H.G. Mascioli and his alter-ego, purported hedge fund, North Street Capital, LP ("NSC"), alleging that Mascioli and NSC made a fraudulent May 2012 offer to acquire all outstanding shares of Winnebago Industries, Inc.'s ("WGO") common stock.

The Commission alleges that, on May 9, 2012, Mascioli authored on NSC letterhead, signed, and sent to WGO an offer to acquire all outstanding common stock of WGO for approximately $321 million in cash. The May 9 letter represented that NSC's offer was not conditioned on any financing, that NSC was prepared to move forward immediately, and that it could complete the process in approximately two weeks. In truth, Mascioli and NSC had virtually no assets, significant liabilities, and no reasonable prospects of securing any financing to fund the acquisition. Furthermore, at the time they made their offer, Mascioli and NSC had not retained any financial or legal advisers to represent them in the transaction. On May 17, having not received a response to the May 9 offer, Mascioli sent a copy of the May 9 letter that he had modified to look like an NSC press release to Bloomberg, which subsequently posted the offer on its website. After NSC's fraudulent offer was made public on May 17, WGO's stock price and trading volume increased significantly. In pre-market trading on May 18, almost 700,000 WGO shares were traded. By contrast, in the four trading days prior to May 18, WGO had little to no volume in pre-market trading. Moreover, on May 17, WGO's stock closed at $8.51 per share; when trading opened on May 18, however, WGO stock opened at $9.81 per share, an almost 15% increase. In pre-market trading on May 18, after learning of NSC's offer for WGO and viewing a public website Mascioli created for NSC that contained various misrepresentations about NSC's business, a New York hedge fund made the decision to cover the majority of a large short position it held in WGO and incurred losses in doing so.

Without admitting or denying the allegations in the complaint, Mascioli and NSC have consented to entry of a final judgment permanently enjoining each of them from violating Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder and ordering them to pay, jointly and severally, a $100,000 civil penalty. Mascioli has also consented to a final judgment that permanently bars him from serving as an officer and/or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act or that is required to file reports pursuant to Section 15(d) of the Exchange Act. The proposed settlement is subject to court approval.

The SEC's investigation was conducted by George Bagnall and George Parizek with assistance from trial attorney Cheryl Crumpton. The Commission acknowledges the assistance of the Financial Industry Regulatory Authority in this matter.

HEDGE FUND MANAGER, COMPANY RECEIVE FINAL JUDGEMENT IN MISAPPROPRIATION CASE

FROM:  SECURITIES AND EXCHANGE COMMISSION 

Final Judgments Entered Against Former Hedge Fund Manager and His Company
The Securities and Exchange Commission announced today that on January 22, 2014, the Honorable Paul G. Gardephe of the United States District Court for the Southern District of New York, entered final judgments against Berton M. Hochfeld (“Hochfeld”) and his wholly-owned entity Hochfeld Capital Management, L.L.C. (“HCM”), in SEC v. Hochfeld et al., 12-CV-8202. The SEC filed an emergency action in November 2012, charging Hochfeld and HCM with securities fraud for misappropriating assets and making material misstatements to investors in the Heppelwhite Fund L.P., a now defunct hedge fund. The Court previously entered judgments against Hochfeld and HCM that ordered, among other relief, injunctions and an asset freeze, and granted the Commission’s motion to create a Fair Fund to compensate defrauded investors. In October 2013, the Fair Fund made initial distributions, totaling more than $6 million, to 35 former Heppelwhite investors, which represented approximately 70% of each investor’s prior capital balance in the hedge fund. Pursuant to a Distribution Plan, the Fair Fund will make a second round of distributions to investors from additional funds collected, including proceeds from the sale of Hochfeld’s personal assets.

Hochfeld and HCM consented to entry of the final judgments, which enjoin them from violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, Section 17(a) of the Securities Act of 1933, and Sections 203 and 206 of the Investment Advisers Act of 1940, and order disgorgement of $1,785,332, which will be deemed satisfied by the criminal forfeiture order entered against Hochfeld in a parallel criminal case filed by the U.S. Attorney’s Office for the Southern District of New York. In the criminal case, United States v. Hochfeld, 13-CR-021, Hochfeld pled guilty to securities fraud and wire fraud. The Court sentenced Hochfeld to a two-year prison term, which he is now serving, and ordered him to pay forfeiture and restitution totaling approximately $2.9 million.

The SEC thanks the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation for their assistance in this matter.

FINAL JUDGEMENT ENTERED AGAINST HEDGE FUND MANAGER

FROM:  SECURITIES AND EXCHANGE COMMISSION 
Final Judgments Entered Against Former Hedge Fund Manager and His Company

The Securities and Exchange Commission announced today that on January 22, 2014, the Honorable Paul G. Gardephe of the United States District Court for the Southern District of New York, entered final judgments against Berton M. Hochfeld ("Hochfeld") and his wholly-owned entity Hochfeld Capital Management, L.L.C. ("HCM"), in SEC v. Hochfeld et al., 12-CV-8202. The SEC filed an emergency action in November 2012, charging Hochfeld and HCM with securities fraud for misappropriating assets and making material misstatements to investors in the Heppelwhite Fund L.P., a now defunct hedge fund. The Court previously entered judgments against Hochfeld and HCM that ordered, among other relief, injunctions and an asset freeze, and granted the Commission's motion to create a Fair Fund to compensate defrauded investors. In October 2013, the Fair Fund made initial distributions, totaling more than $6 million, to 35 former Heppelwhite investors, which represented approximately 70% of each investor's prior capital balance in the hedge fund. Pursuant to a Distribution Plan, the Fair Fund will make a second round of distributions to investors from additional funds collected, including proceeds from the sale of Hochfeld's personal assets.

The final judgments against Hochfeld and HCM enjoin them from violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, Section 17(a) of the Securities Act of 1933, and Sections 203 and 206 of the Investment Advisers Act of 1940, and order disgorgement of $1,785,332, which will be deemed satisfied by the criminal forfeiture order entered against Hochfeld in a parallel criminal case filed by the U.S. Attorney's Office for the Southern District of New York. In the criminal case, United States v. Hochfeld, 13-CR-021, Hochfeld pled guilty to securities fraud and wire fraud. The Court sentenced Hochfeld to a two-year prison term, which he is now serving, and ordered him to pay forfeiture and restitution totaling approximately $2.9 million.


The SEC thanks the U.S. Attorney's Office for the Southern District of New York and the Federal Bureau of Investigation for their assistance in this matter.

HEDGE FUND ADVISER CHARGED WITH BREACHING FIDUCIARY DUTY FOR ROLE IN CONFLICTED PERSONAL TRANSACTION

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Charges N.Y.-Based Hedge Fund Adviser With Breaching Fiduciary Duty By Participating in Conflicted Principal Transaction


2013-183 Washington D.C., Sept. 18, 2013 — The Securities and Exchange Commission charged the adviser to a New York-based hedge fund with breaching his fiduciary duty by engineering an undisclosed principal transaction in which he had a financial conflict of interest.

In a principal transaction, an adviser acting for its own account buys a security from a client account or sells a security to a client account.  Principal transactions can pose potential conflicts between the interests of the adviser and the client, and therefore advisers are required to disclose in writing any financial interest or conflicted role when advising a client on the other side of the trade.  They also must obtain the client’s consent.

The SEC alleges that Shadron L. Stastney, a partner at investment advisory firm Vicis Capital LLC, traded as a principal when he authorized the client hedge fund to pay approximately $7.5 million to purchase a basket of illiquid securities from a personal friend and outside business partner hired by the firm as a managing director.  Stastney required his friend to divest these personal securities holdings as he came on board at the firm because they overlapped with securities in which the hedge fund also was invested.  Stastney failed to tell the client hedge fund or any other partners and management at the firm that he had a financial stake in some of the same securities sold into the fund.  Stastney personally benefited and received a portion of the proceeds from the sale, and therefore was trading as a principal in the transaction.

Stastney agreed to pay more than $2.9 million to settle the SEC’s charges.

“Fund advisers cannot sit on both sides of a transaction as buyer and seller without the consent of the clients who rely on them for unbiased investment advice,” said Julie M. Riewe, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.  “Stastney failed to live up to his fiduciary duty when he unilaterally set the terms of the transaction and authorized it without disclosing that he would personally profit from it.”

According to the SEC’s order instituting a settled administrative proceeding, in late December 2007 and early January 2008, Stastney arranged for his friend to sell the conflicted securities to the client hedge fund – Vicis Capital Master Fund – for $7.475 million.  Stastney’s friend informed him at the time that Stastney had a financial interest in some of the conflict securities, and Stastney would receive a portion of the sales proceeds.

The SEC’s order alleges that Stastney informed his two partners at the firm about the contemplated transaction, but never disclosed his personal financial interest in the transaction to them.  Stastney also did not disclose the conflict to the individual serving as the firm’s chief financial officer and chief compliance officer.  Moreover, Stastney failed to disclose to the trustee of the hedge fund that he had a personal financial interest in the transaction, and failed to obtain the client’s consent as required in a principal transaction.

According to the SEC’s order, after the hedge fund purchased the conflicted securities, Stastney’s friend wired Stastney’s share of more than $2 million of the sales proceeds to his personal savings bank account.

The SEC’s order requires Stastney, who lives in Marlboro, N.J., to pay disgorgement of $2,033,710.46, prejudgment interest of $501,385.06, and a penalty of $375,000.  Stastney also is barred from association with any investment company, investment adviser, broker, dealer, municipal securities dealer, or transfer agent for at least 18 months.  Stastney will be permitted to finish winding down the fund under the oversight of an independent monitor payable at his own expense.  Stastney has consented to the issuance of the order without admitting or denying any of the findings and has agreed to cease and desist from committing or causing any violations and any future violations of Sections 206(2) and 206(3) of the Investment Advisers Act of 1940.

The SEC’s investigation was conducted by Vincenzo A. DeLeo and Brian E. Fitzpatrick of the Asset Management Unit with the assistance of James Flynn, Alistaire Bambach, and Nancy A. Brown in the New York Regional Office.  The case was supervised by Sharon B. Binger.  The investigation began following an examination of the firm by Jennifer M. Klein, Arthur Schmidt, and Belinda L. Rodriquez under the supervision of Dawn M. Blakenship.

SEC OBTAINS EMERGENCY COURT ORDER TO STOP HEDGE FUND FROM DEFRAUDING MILITARY PERSONNEL

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Halts Ex-Marine’s Hedge Fund Fraud Targeting Fellow Military
Washington D.C., Aug. 6, 2013 

The Securities and Exchange Commission obtained an emergency court order to halt a hedge fund investment scheme by a former Marine living in the Chicago area who has been masquerading as a successful trader to defraud fellow veterans, current military, and other investors.

The SEC alleges that Clayton A. Cohn and his hedge fund management firm Market Action Advisors raised nearly $1.8 million from investors through a hedge fund he managed.  Cohn lied to investors about his success as a trader, the performance of the hedge fund, his use of investor proceeds, and his personal stake in the hedge fund.  Cohn only invested less than half of the money raised from investors and instead used more than $400,000 for such personal expenses as a Hollywood mansion, luxury automobile, and extravagant tabs at high-end nightclubs.  He used his lavish lifestyle to carefully contrive the image of a successful trader and investor, when in reality he lost nearly all of the money invested through the hedge fund.  In order to cover up his fraud and continue raising money from investors, Cohn generated phony hedge fund account statements showing annual returns exceeding 200 percent.

“Cohn lured fellow military and other investors into his hedge fund by portraying himself as a successful trader who generated massive returns for his investors,” said Timothy L. Warren, Acting Director of the Chicago Regional Office.  “But Cohn’s hedge fund investors didn’t have a chance to make a profit since he never invested most of their money and promptly lost the portion he did invest.”

According to the SEC’s complaint filed in federal court in Chicago, Cohn targets mostly unsophisticated investors and has solicited friends, family members, and fellow veterans to invest in his hedge fund.  Cohn controls a so-called charity called the Veterans Financial Education Network (VFEN) that purports to teach veterans how to understand and manage their money.  Cohn has touted his Marine Corps pedigree in VFEN press releases and encourages veterans to find “a money-manager who is both trustworthy and knows what he is doing.” VFEN’s website identifies Cohn as a money manager who “manages millions of dollars.”

According to the SEC’s complaint, Cohn managed his hedge fund Market Action Capital Management through his investment advisory firm Market Action Advisors, which is registered with the state of Illinois.  Cohn solicited investments by falsely claiming that he had major success as a personal trader and invested $1.5 million of his own money in the hedge fund.  He also misrepresented that an accounting firm would audit the hedge fund’s financial statements.

The SEC alleges that Cohn had a record of trading losses, invested no more than $4,000 of his own money, and absconded with far more money for his personal expenses.  The audit firm named by Cohn never agreed to audit the fund’s financial statements.  Cohn continued to deceive investors after their initial investment by issuing account statements that showed annual returns of more than 200 percent for 2012 when the hedge fund actually lost money.

The SEC’s complaint charges Cohn and Market Action Advisors with violating the antifraud provisions of the federal securities laws.  The court granted the SEC’s request for emergency relief including a temporary restraining order and asset freeze.  The SEC further seeks permanent injunctions, disgorgement of ill-gotten gains, and financial penalties from Cohn and Market Action Advisors.

The SEC’s investigation was conducted by John J. Sikora, Jr. and Jason A. Howard, and the litigation will be led by Jonathan S. Polish.

SEC CHARGES FORMER PORTFOLIO MANAGER WITH INSIDER TRADING

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Charges Former Portfolio Manager At S.A.C. Capital with Insider Trading

On July 25, 2013, the Securities and Exchange Commission charged a former portfolio manager at S.A.C. Capital Advisors with insider trading ahead of major announcements by technology companies.

The SEC alleges that Richard Lee's illegal trading based on nonpublic information he received from sources with connections to insiders at the technology companies enabled the S.A.C. Capital hedge fund that he managed to generate more than $1.5 million in illegal profits. Lee also made trades in his personal account. The insider trading occurred ahead of public announcements about a Microsoft-Yahoo partnership and the acquisition of 3Com Corporation by Hewlett-Packard.

In a separate action, the U.S. Attorney's Office for the Southern District of New York today announced criminal charges against Lee, who lives in Chicago.

According to the SEC's complaint filed in U.S. District Court for the Southern District of New York, Lee received inside information in July 2009 from a sell-side analyst familiar with nonpublic negotiations between Microsoft and Yahoo to enter into an Internet search engine partnership. Lee learned that the negotiations, previously the subject of market rumors, were moving forward and a deal could be finalized in the next two weeks. The analyst told Lee that the confidential information came from a close personal friend who worked at Microsoft. Lee thanked the analyst for the "very specific information" and promptly purchased hundreds of thousands of shares of Yahoo stock in a portfolio that he managed on behalf of S.A.C. Capital. Lee also purchased shares of Yahoo stock in his personal trading account. When the imminent deal was reported in the press almost a week later, Yahoo's stock price rose approximately four percent on the news and S.A.C. Capital and Lee reaped substantial profits.

The SEC further alleges that Lee received highly confidential information about 3Com from a Beijing-based consultant who he knew had close personal ties with executives at the company. When his source tipped him on Nov. 11, 2009, that 3Com was on the verge of being acquired by Hewlett-Packard, Lee quickly purchased several hundred thousand shares of 3Com stock for the S.A.C. Capital hedge fund. On the basis of the nonpublic information, Lee amassed the sizeable 3Com position just minutes before Hewlett-Packard announced it agreed to acquire 3Com for $2.7 billion. The price of 3Com stock jumped more than 30 percent the next day, and the S.A.C. Capital hedge fund reaped substantial illicit profits as a result of Lee's illegal trades.

The SEC's complaint charges Lee with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint seeks a final judgment ordering Lee to pay disgorgement of his ill-gotten gains plus prejudgment interest and financial penalties, and permanently enjoining him from future violations of these provisions of the federal securities laws.

COURT ORDERS HEDGE FUND MANAGER AND ADVISORY FIRMS TO PAY MORE THAN $26 MILLION

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Court Orders Former Hedge Fund Manager Gad Grieve and Firm to Pay Over $26 Million in Disgorgement and Penalties

The Securities and Exchange Commission announced today that, on April 26, 2013, the Honorable Alvin K. Hellerstein, U.S. District Court Judge for the Southern District of New York, entered final judgments against former New York-based hedge fund manager Grant Ivan (Gad) Grieve and his Finvest advisory firms, ordering them to jointly and severally pay disgorgement of $14,164,780 and civil penalties in the amount of $12,192,302.

The final judgments stem from a civil injunctive action that the Commission filed on February 10, 2009. The SEC’s complaint alleged that defendants Grieve and Finvest fabricated and disseminated false financial information for their Finvest Primer hedge fund that was "certified" by a sham back-office administrator and phony auditing firm that Grieve himself created. The complaint also alleged that Grieve and Finvest provided current and prospective investors in the Finvest Primer and Finvest Yankee hedge funds with false monthly account statements, newsletters, and fact sheets that materially overstated the funds’ performance and assets. According to the Commission, beginning in late 2008, Grieve engaged in similar misconduct overseas, including luring new investors and placating existing investors with counterfeit documents.

The Commission charged Grieve and the Finvest firms with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. On January 26, 2010, Judge Hellerstein entered a default judgment against Grieve, enjoining him from future violations of these provisions and ordering disgorgement and civil penalties with amounts to be determined in later proceedings. The Court entered similar judgments for monetary relief against the Finvest firms on April 23, 2010.

On July 29, 2010, following SEC administrative proceedings, Grieve was barred by default from association with any investment adviser.

SEC CHARGES INVESTMENT ADVISER OF RUNNING $37 MILLION PONZI SCHEME

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

The Securities and Exchange Commission today filed fraud charges against a Portland, Oregon-based investment adviser who perpetrated a long-running Ponzi scheme that raised over $37 million from more than 100 investors in the Pacific Northwest and across the country.

The SEC alleges that Yusaf Jawed used false marketing materials that boasted double-digit returns to lure people to invest their money into several hedge funds he managed. He then improperly redirected their money into accounts he personally controlled. As part of the scheme, Jawed created phony assets, sent bogus account statements to investors, and manufactured a sham buyout of the funds to make investors think their hedge fund interests would soon be redeemed. Jawed misused investor money to pay off earlier investors, pay his own expenses and travel, and create the overall illusion of success and achievement to impress investors.

According to the SEC’s complaint filed in federal court in Portland, Jawed managed a number of hedge funds through at least two companies he controlled: Grifphon Asset Management LLC and Grifphon Holdings LLC. Jawed’s marketing materials claimed that the Grifphon funds earned double-digit returns year after year even as the S&P 500 Index declined. For certain funds, Jawed also falsely claimed they would invest in publicly-traded securities and that their assets were maintained at reputable financial institutions.

The SEC alleges that Jawed instead invested very little of the more than $37 million that he raised from investors. For one fund, 70 percent of the money raised was either paid in redemptions to investors in other funds, paid to finders, or merely transferred to accounts belonging to Grifphon Asset Management or other entities that Jawed controlled. Jawed concealed the fraud by telling Grifphon’s bookkeepers that the money transfers represented purchases of offshore bonds – though in reality the purported investment was a sham entity supposedly managed by Jawed’s unemployed aunt who lives in Bangladesh.

According to the SEC’s complaint, Jawed further deceived investors as the funds were collapsing by telling them that independent third parties were buying the Grifphon funds’ alleged assets at a premium. In truth, the so-called third-parties were sham entities originally formed by Grifphon and Jawed containing no assets, no income, and no ability to pay for the funds’ alleged assets.

The SEC’s complaint against Jawed additionally charges Robert P. Custis, an attorney who Jawed hired to assist him in the fraud. Custis sent false and misleading statements to investors about the status of the purported purchase of the Grifphon funds’ assets. Custis consistently misrepresented that this purchase was imminent and would result in investors’ investments being repaid at a profit.

By engaging in the above conduct, Jawed, GAM, and Grifphon Holdings violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 206(1), 206(2), and 206(4) of the Advisers Act and Rule 206(4)-8 thereunder. By engaging in the above conduct, Custis violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and aided and abetted violations of Section 206(4) and Rule 206(4)-8 thereunder. The Commission seeks a permanent injunction, disgorgement and prejudgment interest, civil penalty, and other relief as appropriate against them.

The SEC filed separate complaints against two others connected to Jawed’s scheme. Those complaints allege that Jacques Nichols – a Portland-based attorney – falsely claimed to investors that an independent third party would pay tens of millions of dollars to buy the hedge funds’ alleged assets at a premium, and that Jawed’s associate, Lyman Bruhn, of Vancouver, Wash., ran a separate Ponzi scheme and induced investments through false claims he was investing in "blue chip" stocks.

Without admitting or denying the allegations, Nichols, Bruhn, and two entities Bruhn controlled (Pearl Asset Management, LLC and Sasquatch Capital Management, LLC) agreed to settle the SEC’s charges. Along with other relief, Bruhn consented to the entry of permanent injunctions against violations of the Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 206(1), 206(2), 206(4) of the Advisers Act and Rule 206(4)-8 thereunder. Along with other relief, Nichols consented to the entry of a permanent injunction against violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and aiding and abetting violations of Sections 206(1), 206(2), and 206(4) of the Advisers Act and Rule 206(4)-8 thereunder. The SEC’s litigation continues against Jawed, the two Grifphon entities, and Custis.

BAY AREA HEDGE FUND MANAGER IN CIVIL CONTEMPT FOR FAILING TO PAY MORE THAN $12 MILLION IN DISGORGEMENT

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
COURT FINDS BAY AREA HEDGE FUND MANAGER IN CIVIL CONTEMPT FOR FAILING TO PAY MORE THAN $12 MILLION IN DISGORGEMENT TO DEFRAUDED INVESTORS
June 25, 2012
The Securities and Exchange Commission (“Commission”) announces that on June 20, 2012, an Order Finding Defendants In Civil Contempt was issued by a judge in the United States District Court for the Northern District of California against defendants Lawrence R. Goldfarb (“Goldfarb”) and Baystar Capital Management, LLC (“Baystar Capital”) in the proceeding entitledSecurities and Exchange Commission v. Lawrence R. Goldfarb, et. al, Case No. C-11-00938-WHA. The Order found that defendants failed to pay disgorgement in compliance with the provisions of a Final Judgment entered against them on March 16, 2011 and furthermore failed to demonstrate that they reasonably attempted to comply with their disgorgement obligations.

Previously, on March 1, 2011, the Commission filed a Complaint against investment advisers Goldfarb and Baystar Capital alleging that they violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 by engaging in a fraudulent scheme with respect to their funds [15 U.S.C. §§ 80b-6(1), (2)]. The Complaint also alleged that Goldfarb and Baystar Capital made material misstatements and omissions, and engaged in a fraudulent scheme, with respect to investors in a pooled investment vehicle in violation of Sections 206(4) and Rule 206(4)-8 of the Advisers Act [15 U.S.C. § 80b-6(4); 17 C.F.R. § 275.206(4)-8]. These violations were based upon allegations that defendants took $12 million in proceeds from an investment under their management and misappropriated those proceeds for their own use, rather than distributing those proceeds to investors.

At the same time that it filed the Complaint, the Commission also filed the written Consents of Goldfarb and of Baystar Capital to the entry of a Final Judgment against them. Without admitting or denying the Complaint’s allegations, defendants agreed, among other things, to pay $12,112,416 in disgorgement and $1,967,371 in prejudgment interest to the court’s registry within 365 days of entry of the Final Judgment. Defendants also agreed to make four progress payments, including a $1.025 million payment due within 180 days of entry of the Final Judgment. Defendants eventually made three progress payments totaling $80,000 in disgorgement, but failed to make the $1.025 million progress payment or the final payment.

In April 2012, the Commission filed an Application with the Court for an order for defendants to show cause why they should not be found in civil contempt of the Final Judgment.

In its Order dated June 20, 2012, the Court found that the defendants were in breach of the Final Judgment by failing to pay the disgorgement amounts ordered. The Court also found that defendants had failed to establish a good faith effort to fulfill their disgorgement obligations because, among other things, they used available funds for large personal expenses such as courtside seats to Golden State Warriors games, charters of aircraft for personal trips, Goldfarb’s mortgage payment and numerous personal vacations, rather than to pay disgorgement.

In the Order, the Court also approved the appointment of a receiver over defendants’ assets and reaffirmed its prior order limiting Goldfarb’s monthly spending.