BILLION DOLLAR HEDGE FUND ADVISORY FIRM CHARGED WITH COOKING THE BOOKS BY SEC

FROM: U.S SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., Oct. 17, 2012 – The Securities and Exchange Commission today charged a former $1 billion hedge fund advisory firm and two executives with scheming to overvalue assets under management and exaggerate the reported returns of hedge funds they managed in order to hide losses and increase the fees collected from investors.

The SEC alleges that New Jersey-based Yorkville Advisors LLC, founder and president Mark Angelo, and chief financial officer Edward Schinik enticed pension funds and other investors to invest in their hedge funds by falsely portraying Yorkville as a firm that managed a highly-collateralized investment portfolio and employed a robust valuation procedure. They misrepresented the safety and liquidity of the investments made by the hedge funds, and charged excessive fees to the funds based on the fraudulently inflated values of the investments.

This is the seventh case arising from the SEC’s Aberrational Performance Inquiry, an initiative by the Enforcement Division’s Asset Management Unit that uses proprietary risk analytics to identify hedge funds with suspicious returns. Performance that is flagged as inconsistent with a fund’s investment strategy or other benchmarks forms a basis for further investigation and scrutiny.

"The analytics put Yorkville front and center on our radar screen," said Bruce Karpati, Chief of the SEC Enforcement Division’s Asset Management Unit. "When we looked further we found lies to investors and the firm’s auditors as well as a scheme to inflate fees by grossly overvaluing fund assets. We will continue to pursue hedge fund managers whose success is based on fiction rather than fact."

According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Yorkville, Angelo, and Schinik defrauded investors in the YA Global Investments (U.S.) LP and YA Offshore Global Investments Ltd hedge funds.

The SEC alleges that Yorkville and the two executives:
Failed to adhere to Yorkville’s stated valuation policies.
Ignored negative information about certain investments by the funds.
Withheld adverse information about fund investments from Yorkville’s auditor, which enabled Yorkville to carry some of its largest investments at inflated values.
Misled investors about the liquidity of the funds, collateral underlying the investments, and Yorkville’s use of a third-party valuation firm.
The SEC alleges that by fraudulently making Yorkville’s funds more attractive to potential investors, Angelo and Schinik enticed more than $280 million in investments from pension funds and funds of funds. This enabled Yorkville to charge the funds at least $10 million in excess fees based on the inflated values of Yorkville’s assets under management.

The SEC’s complaint charges Yorkville with violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5. Yorkville also is charged with violating Sections 206(1), (2) and (4) of the Investment Advisers Act of 1940 and Rule 206(4)-8. Angelo is charged with violating Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5, and Sections 206(1), (2) and (4) of the Advisers Act and Rule 206(4)-8. He also is charged with aiding and abetting Yorkville’s violations of the Exchange Act and Advisers Act. Schinik is charged with violating Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5, and with aiding and abetting Yorkville’s violations of the Exchange Act and Advisers Act.

The SEC’s Aberrational Performance Inquiry is a joint effort among staff in its Division of Enforcement, Office of Compliance, Inspections and Examinations, and Division of Risk, Strategy and Financial Innovation. The SEC’s investigation was conducted by Stephen B. Holden, Brian Fitzpatrick, and Kenneth Gottlieb with the support of Frank Milewski under the supervision of Valerie A. Szczepanik and Ken Joseph. The SEC’s litigation is being led by Todd Brody.

FORMER CEO AND CHAIRMAN OF THE BOARD OF PUDA COAL, INC., ARE CHARGED WITH FRAUD BY SEC

The following excerpt is from the SEC website:

SEC Charges Chairman and Ex-CEO of Puda Coal With Fraud

On February 22, 2012, the Securities and Exchange Commission filed a civil injunctive action in the United States District Court for the Southern District of New York charging the Chairman of Puda Coal, Inc. (“Puda”) and the former CEO of Puda with securities fraud for the undisclosed theft of the primary asset of the U.S. public company they controlled. The Commission’s complaint alleges as follows:

Defendants Ming Zhao, the Chairman of Puda, and Liping Zhu, Puda’s former CEO, perpetrated a massive fraud on Puda’s public shareholders by effectively stealing and selling Puda’s operating subsidiary. Before the defendants’ fraud, Puda held an indirect 90% ownership stake in Shanxi Puda Coal Group Co., Ltd (“Shanxi Coal”), a coal mining company located in the Shanxi Province of the People’s Republic of China (“PRC”). In September 2009, just weeks before Puda announced that Shanxi Coal had received a highly lucrative mandate from the provincial government authorities to become a consolidator of smaller coal mining companies, Zhao, with Zhu’s knowledge and complicity, transferred Puda’s 90% stake in Shanxi Coal to himself. In July 2010, Zhao transferred a 49% equity interest in Shanxi Coal to CITIC Trust Co. Ltd. (“CITIC Trust”), a Chinese private equity fund controlled by CITIC Group, which is reported to be the largest state-owned investment firm in the PRC. CITIC Trust placed its 49% stake in Shanxi Coal in a trust and then sold interests in the trust to Chinese investors. In addition, Zhao caused Shanxi Coal to pledge 51% of its assets to CITIC Trust as collateral for a loan of RMB 3.5 billion ($516 million) from the trust to Shanxi Coal. In exchange, CITIC Trust gave Zhao 1.212 billion preferred shares in the trust. None of these asset transfers were approved by Puda’s board or its shareholders or disclosed in Puda’s various SEC filings, which Zhao and Zhu signed knowing that those documents were materially false and misleading. Puda also conducted two public offerings in 2010 in the U.S. without disclosing that it no longer had any ownership stake in the coal company, Puda’s sole source of revenue. Thus, at the same time that CITIC Trust was effectively selling interests in the coal company to Chinese investors, Zhao and Zhu were still telling U.S. investors that Puda owned a 90% stake in that company.

In addition, Zhao and Zhu continued their fraudulent scheme to deceive public investors even after the Commission began its investigation. As part of the fraud, Zhu forged a letter purporting to be from CITIC Trust which falsely stated that no funds had actually been loaned to Shanxi Coal and disclaimed any interest in Puda’s or Shanxi Coal’s assets. Zhao’s counsel then provided the forged letter to the Commission’s investigative staff and to Puda’s audit committee in an effort to create the false impression that Puda and its public shareholders had not been harmed by the asset transfers. After Puda disclosed the letter to the public in an SEC filing, further misleading shareholders about the ownership of Puda’s assets, the letter was exposed as a forgery. Zhu admitted forging the letter and resigned as CEO, but Zhao remains Chairman. As a result of the defendants’ fraud, Puda is now little more than a shell company, with no ongoing business operations.

Both Zhao and Zhu are charged in the Commission’s complaint with violations of Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(b)(5), and 14(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rules 10b-5, 13b2-1, 13b2-2, 14a-3, and 14a-9a thereunder. Both men are also alleged to be liable pursuant to Section 20(a) of the Exchange Act as control persons of Puda for Puda’s violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder, and that they are also liable pursuant to Section 20(e) of the Exchange Act for aiding and abetting those violations. Zhu is also charged with violating Exchange Act Rule 13a-14. Finally, the Commission alleges, in the alternative, that Zhao and Zhu are liable pursuant to Section 20(a) of the Exchange Act as control persons of Puda for Puda’s violations of Sections 10(b) and 14(a) of the Exchange Act and Rules 10b-5(a), 10b-5(b), and 10b-5(c), 14a-3 and 14a-9, and that they are also liable pursuant to Section 20(e) of the Exchange Act for aiding and abetting those violations.

The complaint seeks a final judgment permanently enjoining the defendants from committing future violations of these provisions, ordering them to disgorge their ill-gotten gains plus prejudgment interest, imposing financial penalties and barring them from acting as officers or directors of a public company."