SEC ANNOUNCES SETTLEMENT WITH HARBINGER CAPITAL PARTNERS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today announced that New York-based hedge fund adviser Philip A. Falcone and his advisory firm Harbinger Capital Partners have agreed to a settlement in which they must pay more than $18 million and admit wrongdoing.  Falcone also agreed to be barred from the securities industry for at least five years.

The SEC filed enforcement actions in June 2012 alleging that Falcone improperly used $113 million in fund assets to pay his personal taxes, secretly favored certain customer redemption requests at the expense of other investors, and conducted an improper “short squeeze” in bonds issued by a Canadian manufacturing company.  In the settlement papers filed in court today, Falcone and Harbinger admit to multiple acts of misconduct that harmed investors and interfered with the normal functioning of the securities markets.

“Falcone and Harbinger engaged in serious misconduct that harmed investors, and their admissions leave no doubt that they violated the federal securities laws,” said Andrew Ceresney, Co-Director of the SEC’s Division of Enforcement.  “Falcone must now pay a heavy price for his misconduct by surrendering millions of dollars and being barred from the hedge fund industry.”

The settlement, which must be approved by the U.S. District Court for the Southern District of New York, requires Falcone to pay $6,507,574 in disgorgement, $1,013,140 in prejudgment interest, and a $4 million penalty.  The Harbinger entities are required to pay a $6.5 million penalty.  Falcone has consented to the entry of a judgment barring him from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization with a right to reapply after five years.  The bar will allow him to assist with the liquidation of his hedge funds under the supervision of an independent monitor.

Among the set of facts that Falcone and Harbinger admitted to in settlement papers filed with the court:

Falcone improperly borrowed $113.2 million from the Harbinger Capital Partners Special Situations Fund (SSF) at an interest rate less than SSF was paying to borrow money, to pay his personal tax obligation, at a time when Falcone had barred other SSF investors from making redemptions, and did not disclose the loan to investors for approximately five months.

Falcone and Harbinger granted favorable redemption and liquidity terms to certain large investors in HCP Fund I, and did not disclose certain of these arrangements to the fund’s board of directors and the other fund investors.

During the summer of 2006, Falcone heard rumors that a Financial Services Firm was shorting the bonds of the Canadian manufacturer, and encouraging its customers to do the same.

In September and October 2006, Falcone retaliated against the Financial Services Firm for shorting the bonds by causing the Harbinger funds to purchase all of the remaining outstanding bonds in the open market.

Falcone and the other Defendants then demanded that the Financial Services Firm settle its outstanding transactions in the bonds and deliver the bonds that it owed.  Defendants did not disclose at the time that it would be virtually impossible for the Financial Services Firm to acquire any bonds to deliver, as nearly the entire supply was locked up in the Harbinger funds’ custodial account and the Harbinger funds were not offering them for sale.

Due to Falcone’s and the other Defendants’ improper interference with the normal interplay of supply and demand in the bonds, the bonds more than doubled in price during this period.

The SEC’s investigation was conducted by Conway T. Dodge, Jr., Robert C. Besse, Ken C. Joseph, Mark Salzberg, Brian Fitzpatrick, and David Stoelting.  The SEC’s litigation was handled by Mr. Stoelting, Mr. Besse, Mr. Salzberg, Kevin McGrath, David J. Gottesman, and Bridget Fitzpatrick.

SEC OBTAINS COURT ORDER TO HALT ALLEGED HEDGE FUND FRAUD TARGETING MILITARY PERSONNEL

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Halts Ex-Marine’s Hedge Fund Fraud Targeting Fellow Military
 FOR IMMEDIATE RELEASE
2013-149
Washington D.C., Aug. 6, 2013 —

The Securities and Exchange Commission today 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.

FAKE HEDGE FUND MANAGER SENTENCED TO 40 MONTHS IN PRISON

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
The Securities and Exchange Commission today announced that Andrey C. Hicks of Boston, Mass., has been sentenced to 40 months in prison in connection with criminal charges brought by the U.S. Attorney for the District of Massachusetts. In a criminal complaint unsealed on October 28, 2011, Hicks was charged with committing wire fraud, attempting to commit wire fraud, and aiding and abetting wire fraud, in violation of 18 U.S.C. Sections 1343, 1349, and 2. In addition to his prison term, Hicks was ordered to pay $2.3 million in restitution and faces three years of supervised release upon completion of his prison term. Hicks pled guilty to the charges on December 12, 2012.

On October 26, 2011, the SEC filed an emergency enforcement action charging Hicks and Locust Offshore Management, LLC, his investment advisory firm, with fraud in connection with misleading prospective investors about their supposed quantitative hedge fund and diverting investor money to the money manager's personal bank account. The SEC alleges in its complaint that Hicks and his advisory firm made misrepresentations about his education, work experience, and the hedge fund's auditor, prime broker/custodian, and corporate status when soliciting individuals to invest in the purported hedge fund, called Locust Offshore Fund, Ltd. By making these representations and creating other indicia of legitimacy, the SEC alleged that Hicks may have obtained at least $1.7 million from 10 investors and may have misappropriated at least a portion of these funds for personal expenses. In the Commission's action, the U.S. District Court in Massachusetts issued a temporary restraining order on October 26 that, among other things, freezes the assets of the money manager, his advisory firm, and the hedge fund. On October 28, 2011, the Court converted the temporary restraining order into a preliminary injunction that will continue the asset freeze and other relief until further order of the Court. On March 20, 2012, Judge Richard Stearns of the U.S. District Court for the District of Massachusetts entered final judgments by default against Locust Offshore Management, LLC, and its CEO, Andrey C. Hicks. The Judgments jointly and severally ordered Hicks and Locust Offshore Management to pay disgorgement of $2,481,004 and prejudgment interest of $31,054.39. In addition, Hicks was ordered to pay a civil penalty in the amount of $2,512,058.39, and Locust Offshore Management was ordered to pay a civil penalty in the amount of $2,512,058.39.

On June 15, 2012, SEC Administrative Law Judge Cameron Elliott entered an order making findings and imposing sanctions by default against Hicks barring him from association with an investment adviser, broker, dealer, municipal securities dealer, municipal advisor, transfer agent, or national recognized statistical rating organization. And on June 19, 2012, ALJ Elliott entered a similar order against Locust Offshore Management barring it from acting as an investment adviser.

SEC ANNOUNCES ASSET FREEZE AGAINST ASSET ADVISER CHARGED WITH STEALING

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., March 18, 2013 — The Securities and Exchange Commission today announced an asset freeze against a Massachusetts-based investment adviser charged with stealing money from clients who were given the false impression they were investing in a hedge fund.

In a complaint unsealed today in federal court in Boston, the SEC alleges that Gregg D. Caplitz and Insight Onsite Strategic Management in Wilmington, Mass., raised at least $1.1 million from clients that was used for purposes other than investing in the hedge fund they purported to manage. Investor money was merely transferred to the firm’s chief investment officer and other members of her family who spent it on personal expenses. The firm reported in SEC filings that it has $100 million in assets under management, however the purported hedge fund actually has no assets.

U.S. District Judge Mark L. Wolf granted the SEC’s request for an emergency court order to freeze the assets of Caplitz and his firm as well as others who received investor money and have been named as relief defendants for the purposes of recovering investor funds in their possession.

"Caplitz and his firm conjured up a hedge fund to lure longtime clients into investing substantial amounts of money that became nothing more than a slush fund to pay bills for others," said Julie M. Riewe, Deputy Chief of the SEC Enforcement Division’s Asset Management Unit.

According to the SEC’s complaint, Caplitz’s scheme began around 2009. While soliciting funds, Caplitz convinced one client and his wife to invest $275,000 in the hedge fund that Caplitz claimed would generate them about $1,000 per month in returns. Caplitz also solicited a 20-year client who after considering his sales pitch decided not to invest in the hedge fund because she considered it too risky of an investment for someone her age. But Caplitz apparently took action to obtain funds from the client’s IRA account and wire thousands of dollars to an Insight Onsite Strategic Management bank account. The client was not aware of the transfers and did not authorize them.

The SEC alleges that instead of using investor funds to purchase shares in a hedge fund or to manage or develop a hedge fund, Caplitz transferred control of client money to Rosalind Herman, his friend who works at the firm. Investor funds also were transferred to her sons Brad and Brian Herman, daughter-in-law Charlene Herman, and a company called The Knew Finance Experts. The Hermans, who all live in Las Vegas, own that company. The Hermans used investor money to pay legal bills and other personal expenses at gas stations, drugstores, and restaurants.

The SEC alleges that as part of his scheme, Caplitz obtained funds from a real estate investment trust (REIT) by falsely representing that a hedge fund he operated was interested in making an investment in that trust. The public, non-traded REIT gave $135,000 to Caplitz so he could conduct due diligence on the REIT as a precursor to making a $5 million investment that never materialized.

The SEC alleges that Caplitz and Insight Onsite Strategic Management violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, Section 17(a) of the Securities Act of 1933, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The complaint seeks a permanent injunction plus disgorgement, prejudgment interest, and a penalty against Caplitz and his firm. The complaint also names the four Hermans and The Knew Finance Experts as relief defendants and seeks disgorgement plus prejudgment interest.

The SEC’s investigation was conducted in the Boston Regional Office by Mayeti Gametchu and Kevin Kelcourse of the Asset Management Unit and Susan Cooke Anderson. The litigation will be led by Kathy Shields and Ms. Gametchu.

HEDGE FUND MANAGER AND FIRM TO PAY ALMOST $5 MILLION FOR ENGAGING IN DECEPTIVE CONDUCT

FROM: U.S. SECRUITIES AND EXCHANGE COMMISSION

Court Orders New York-Based Hedge Fund Manager and Firm to Pay Nearly $5 Million in Disgorgement and Penalties

The Securities and Exchange Commission announced today that, on January 3, 2013, Judge Paul A. Engelmayer of the U.S. District Court for the Southern District of New York entered final judgments against hedge fund manager Chetan Kapur and his firm, ThinkStrategy Capital Management (ThinkStrategy), ordering them to jointly and severally pay disgorgement of $3,988,196.59 and civil penalties in the amount of $1,000,000.

The final judgments stem from a partially-settled civil injunctive action filed by the Commission on November 10, 2011. The SEC’s complaint alleged that over nearly seven years, Kapur and ThinkStrategy engaged in a pattern of deceptive conduct designed to bolster their track record, size, and credentials. In particular, Kapur and ThinkStrategy materially overstated the performance of their ThinkStrategy Capital Fund, giving investors the false impression that the fund’s returns were consistently positive and minimally volatile. The complaint also alleged that Kapur and ThinkStrategy repeatedly inflated the firm’s assets, exaggerated the firm’s longevity and performance history, and misrepresented the size and credentials of ThinkStrategy’s management team.

With respect to a second hedge fund they managed, the TS Multi-Strategy Fund, the complaint alleged that Kapur and ThinkStrategy misstated the scope and quality of due diligence checks on certain managers and funds selected for inclusion in the fund-of-funds’ portfolio. As a result, the TS Multi-Strategy Fund made investments in certain hedge funds that were later revealed to be Ponzi schemes or other serious frauds, including Bayou Superfund, Valhalla/Victory Funds, and Finvest Primer Fund.

The Commission charged Kapur and ThinkStrategy 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. Without admitting or denying the allegations in the Commission’s complaint, Kapur and ThinkStrategy consented to the entry of November 18, 2011 judgments permanently enjoining them from violating the above provisions. Kapur also consented to a November 30, 2011 SEC order permanently barring him from association with any investment adviser, broker, dealer, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization.

SEC CHARGES OREGON-BASED HEDGE FUND MANAGER WITH RUNNING $37 MILLION PONZI SCHEME

Photo: Oregon's Mt. Hood Territory. Credit: Wikimedia.

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.

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

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
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.