HEDGE FUND ADVISER CHARGED WITH DECEPTION REGARDING EXECUTIVE "SKIN IN THE GAME"

Photo:  Miami Beach.  Credit:  Wikimedia.
FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., May 29, 2012 – The Securities and Exchange Commission today charged a Miami-based hedge fund adviser for deceiving investors about whether its executives had personally invested in a Latin America-focused hedge fund.

The SEC’s investigation found that Quantek Asset Management LLC made various misrepresentations about fund managers having “skin in the game” along with investors in the $1 billion Quantek Opportunity Fund. In fact, Quantek’s executives never invested their own money in the fund. The SEC’s investigation also found that Quantek misled investors about the investment process of the funds it managed as well as certain related-party transactions involving its lead executive Javier Guerra and its former parent company Bulltick Capital Markets Holdings LP.

Bulltick, Guerra, and former Quantek operations director Ralph Patino are charged along with Quantek in the SEC’s enforcement action. They agreed to pay more than $3.1 million in total disgorgement and penalties to settle the charges, and Guerra and Patino agreed to securities industry bars.

“When making an investment decision, private fund investors are entitled to the unvarnished truth about material information such as management’s skin in the game or the adviser’s handling of related-party transactions,” said Bruce Karpati, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “Quantek’s investors deserved better than the misleading information they received in marketing materials, side letters, and other fund documents.”

According to the SEC’s order instituting settled administrative proceedings, fund investors frequently inquire about the extent of the manager’s personal investment during their due diligence process, and many require it in fund selection. Quantek, particularly Patino, misrepresented to investors from 2006 to 2008 that management had skin in the game. These misstatements were made when responding to specific questions posed in due diligence questionnaires that were used to market the funds to new investors. Quantek made similar misrepresentations in side letter agreements executed by Guerra with two sought-after institutional investors.

The SEC’s order also found that Quantek misled investors about certain related-party loans made by the fund to affiliates of Guerra and Bulltick. Because the fund permitted related-party transactions with Bulltick and other Quantek affiliates, investors were wary of deals that were not properly disclosed. In 2006 and 2007, Quantek caused the fund to make related-party loans to affiliates of Guerra and Bulltick that were not properly documented or secured at the outset. Quantek and Bulltick employees later re-created the missing related-party loan documents, but misstated key terms of the loans and backdated the materials to give the appearance that the loans had been sufficiently documented and secured at all times. Quantek and Guerra provided this misleading loan information to the fund’s investors.

“The related-party transactions were problematic to begin with, and the false deal documents left investors in the dark about the adviser’s conflicts of interest,” said Scott Weisman, Assistant Director in the SEC Enforcement Division’s Asset Management Unit.

According to the SEC’s order, Quantek also repeatedly failed to follow the robust investment approval process it had described to investors in the fund. Quantek concealed this deficiency by providing investors with backdated and misleading investment approval memoranda signed by Guerra and other Quantek principals.

Quantek, Guerra, Bulltick, and Patino settled the charges without admitting or denying the findings. Quantek and Guerra agreed jointly to pay more than $2.2 million in disgorgement and pre-judgment interest, and to pay financial penalties of $375,000 and $150,000 respectively. Bulltick agreed to pay a penalty of $300,000, and Patino agreed to a penalty of $50,000. Guerra consented to a five-year securities industry bar, and Patino consented to a securities industry bar of one year. Quantek and Bulltick agreed to censures. They all consented to orders that they cease and desist from committing or causing violations of certain antifraud, compliance, and recordkeeping provisions of the Investment Advisers Act of 1940 and the Securities Act of 1933.

The SEC’s investigation was conducted by Matthew Rossi in the Enforcement Division’s Asset Management Unit under the supervision of Mr. Weisman.

COURT ENTERS $98.6 MILLION JUDGMENT AGAINST U.K. HEDGE FUND ADVISER PENTAGON CAPITAL MANAGEMENT PLC AND CEO

March 30, 2012
FROM:  SEC  WEBSITE
On Wednesday, March 28, 2012, United States District Judge Robert W. Sweet of the Southern District of New York entered a final judgment in favor of the U.S. Securities and Exchange Commission ordering total monetary relief of $98.6 million. The final judgment enjoins Defendants Pentagon Capital Management (“PCM”), a United Kingdom based hedge fund adviser, and its chief executive officer, Lewis Chester, from violating the antifraud provisions of the securities laws, Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder. In addition, the final judgment orders PCM and Chester, on a joint and several basis with their hedge fund client Relief Defendant Pentagon Special Purpose Fund, Ltd., to pay $60,204,423.20, representing $38,416,500 in disgorgement of their ill-gotten gains and $21,787,923.20 in prejudgment interest. Finally, the final judgment imposes a civil money penalty of $38,416,500, on a joint and several basis, against PCM and Chester.

Previously, on February 15, 2012, the Court issued an Opinion finding that Defendants “intentionally, and egregiously,” violated the antifraud provisions of the securities laws by engaging in a late trading scheme to defraud United States mutual funds. Late trading refers to the practice of placing orders to buy, redeem, or exchange U.S. mutual fund shares after the time as of which the funds calculate their net asset value (usually as of the close of trading at 4:00 p.m. ET), but receiving the price based on the net asset value already determined as of 4:00 p.m. The same day that the Court entered the final judgment, the Court also issued an Opinion explaining its decision to impose a penalty equal to the disgorgement ordered because,inter alia, “Defendants understood that late trading was illegal and acted with marked scienter, going to great lengths to seek out, structure, and maintain the ability to deceive the funds into accepting their late trades and attempting to cover up their late trading after the fact.”

Chester, age 43, is a resident of London, England. PCM is an investment adviser and investment manager based in London, England, and is registered with the United Kingdom Financial Services Authority. Pentagon Special Purpose Fund, Ltd. is an international business company incorporated in the British Virgin Islands.