The Securities and Exchange Commission (SEC) has charged a Minneapolis hedge fund manager, his investment advisory firm and an employee with multiple counts of securities violations arising out of alleged falsification of research expenses and other improper conduct. The suit filed in federal court in Minnesota alleges that the defendants used two hedge funds to defraud investors out of more than $1 million. The complaint further alleges that the parties schemed to manipulate the stock price of the funds largest holding.
Fake Research Expenses
According to the charges, as the investment advisory firms management fees declined due to poor fund performance, the firms owner and an employee concocted a scheme whereby the funds routinely reimbursed the firm for non-existent research expenses. Much of that money was, in fact, used for the owners personal expenses such as country club dues, luxury car expenses and other items.
Soft Dollars Generated
The owner and employee disguised the employees $10,000 monthly salary as research fees because under the SEC rules for their type of hedge fund, employees could not draw a salary from fund assets. To generate more soft dollars for diverting to the employee, the two defendants traded excessively in the funds brokerage accounts.
Investors were actually charged twice for the same false research expenses: First, the funds were billed directly for purported research conducted by the employee on behalf of the funds; and second, the owner and employee diverted soft dollars from the hedge funds to the employee for the same phony researchbut this time under the guise that the employee was acting as an independent consultant.
Banging the Close
The complaint alleges that a separate scheme was undertaken whereby the price of the funds largest stock holding was banged at the close in order to inflate the monthly returns reported to investors and conceal the true extent of the funds mounting investment losses. Under such a technique, the firm placed multiple buy orders just seconds before the market closed on the last day of trading in order to artificially inflate the value of the portfolio. Those inflated valuations were then extrapolated in order to give the impression of higher monthly fund returns. The defendants allegedly engaged in such portfolio pumping no less than 28 times.
According to Robert J. Burson, associate director of the SECs Chicago Regional Office: [The fund owner] and his firm had an obligation to manage investor money in the hedge funds fairly and honestly. Instead, he and [his employee] exploited their control of the funds to engage in long-running schemes to misappropriate fund assets and artificially pump up the value of the poorly performing funds.
David draws on 20+ years’ experience in both legal practice and in business services delivery since his own call to the Bar in 1989. With several years in the startup environment, including as a co-founder in the legal tech space specifically, he brings a unique and timely perspective on the role of data, automation and artificial intelligence in the modern and efficient delivery of services for legal consumers. Having been both a corporate buyer of legal services and a services provider, he identifies the greater efficiency and value that can be achieved in legal operations for corporate buyers especially.
An attorney, David worked for law firms Pinsent Masons and Linklaters in London before moving to New York to join Credit Suisse. As CAO, he helped negotiate & execute the relocation of Credit Suisse into its new NYC global HQ. Subsequently, David directed major global outsourcing, shared sourcing, HR operations & process efficiency initiatives including the digitization of records, the global roll-out of PeopleSoft HRMS & Y2K. David has worked extensively in the UK, US, Philippines, India and China markets in the areas of data management, human resources and business process outsourcing.
Most recently, David has been successfully investing in and serving as an advisory board member of several legal services start-ups including a cloud-based solution for legal process automation and e-filing; and a technology solution for large-scale capture of court and other public data used for litigation analysis, among others.
David graduated from the University of Manchester with Honors in Law and Bar School (College of Legal Education) in London, and has been a member of Middle Temple since 1989. He is the founder and former Chairman of The Global Sourcing Council.
Member: Bar of England & Wales, ABA, NYCBA, ACC, DRI