SEC: Hedge Fund Manager at Center of Fraud Scheme

Screen-Shot-2014-09-17-at-12.50.41 SEC: Hedge Fund Manager at Center of Fraud Scheme

A hedge fund manager who was charged by the Securities and Exchange Commission (SEC ) in 2012 with defrauding clients around the world — he allegedly hid major losses during the financial crisis while assuring investors that their investments were performing quite well — has again been charged with fraud, this time based on his dealings with a Bahamas-based brokerage firm. Despite having his assets frozen in 2012, he managed to stay in the game and under the SEC radar — until now.

Claimed $1.5 Billion in AUM

In 2012, the fund manager claimed that he had $1.5 billion in assets under management on behalf of investors around the world. Despite suffering losses due to investment in the Bernard Madoff debacle and a failed derivatives investment, he boasted of “benchmark-beating returns” in order to attract new investors. He made use of both a Panamanian firm and a Hong Kong-based firm to dupe investors.

Manager Created False Statements

The current case alleges that the manager colluded with the Bahamas firm by creating false statements, which overstated the value of investors’ assets by more than $150 million while the Bahamas-based company acted as “custodian” over the fund’s assets. The firm allowed the manager to prepare false statements on their letterhead, and the firm routinely provided the false account statements to auditors and others acting on behalf of the hedge fund’s investors.

$45 Million Misappropriated

According to the SEC, the Bahamas firm allowed the hedge fund manager to misappropriate over $45 million of investor funds by transferring money at the manager’s request from investor accounts to accounts that were directly under the manager’s control. Furthermore, the manager used investor funds to pay the brokerage firm more than $5 million in exchange for assisting with the scheme.

According to Timothy Warren, associate director of the SEC’s Chicago Regional Office: “We allege that Brown and his firm enabled [the hedge fund manager’s] scheme by providing investors with false assurances about who was holding their money and how much money they had in their accounts.”

Brokerage Firm Not Custodian Since 2009

According to SEC charges filed in U.S. District Court in Chicago, the Bahamas firm did not have custody of most of the assets listed on investor account statements since 2009, yet they continued to represent to the hedge fund’s investors that they were in fact the custodian of those assets.

Investigation Continuing

The SEC charges thus far have alleged 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; however, the investigation is continuing, and further charges could be filed in the case.