The SEC taken action to freeze the assets of Ponzi scheme involving U.S. and New Zealand-based companies peddling sham investment opportunities ranging from a bank trading program to kidney dialysis clinics.
Christopher A.T. Pedras, who has residences in Turlock, Calif., and New Zealand, misled his initial investors when his hedge fund encountered problems paying the promised 4 to 8% monthly returns. Pedras began steering investors to a different investment program to purportedly increase the value of their investment by 80% by funding kidney dialysis clinics in New Zealand. However, the money was never invested as promised. Earlier investors were paid supposed returns with funds received from newer investors, and Pedras stole more than $2 million and spent another $1.2 million on sales agents. The SEC alleges that the Ponzi scheme paid investors more than $2.4 million in “returns” using new investor money.
“Rather than conducting any legitimate business activity, Pedras and his partners were simply operating a Ponzi scheme that was ultimately doomed to collapse,” said Michele Wein Layne, director of the SEC’s Los Angeles Regional Office. “This emergency action stops them from fraudulently raising any more money from U.S. investors.”
Pedras raised more than $5.6 million from at least 50 investors in the U.S. since July 2010 by selling securities in two phases, the SEC says.
According to the SEC’s complaint, during at least one conference call, Pedras advised investors not to respond if contacted by the SEC. He characterized SEC investor questionnaires as “fake” and stated that the SEC’s investigation was motivated by a “personal vendetta” against him.
As new rules and regulations are being placed on the hedge fund industry, the role of service providers has become increasingly important, Risk.Net reports.
Investors into hedge funds are also monitoring service providers as part of the due diligence process. Both factors highlight the role played by services providers in keeping hedge funds compliant with regulations and supporting them in ongoing due diligence scrutiny by investors.
This year’s service provider rankings reinforce the importance of this segment of the industry. While some areas saw little change in voting patterns, there were some surprises in the changing preferences of voters.
Herre are some of the winners:
Fund administrator (single manager)
1 Citco (22.5%)
2 Apex Fund Services (14.6%)
3 JP Fund Administration (12.1%)
4 SS&C GlobeOp (8.1%)
5 Deutsche Bank (7.4%)
Fund administrator (FoHFs)
1 Citco (19.7%)
2 Apex Fund Services (18.5%)
3 JP Fund Administration (11.9%)
4 Deutsche Bank (10.2%)
5 BNP Paribas Security Services (9.6%)
Managed account platform from hedge fund viewpoint
1 Deutsche Bank (24.5%)
2 Lyxor Asset Management (15.1%)
3 Morgan Stanley (11.0%)
4 AlphaMetrix (8.6%)
5 Gottex (7.6%)
Managed account platform from investor viewpoint
1 Deutsche Bank (20.4%)
2 Morgan Stanley (14.9%)
3 Lyxor Asset Management (11.9%)
4 AlphaMetrix (9.7%)
5 Innocap (7.5%)
Ucits platform from hedge fund viewpoint
1 Deutsche Bank (23.8%)
2 Alpha Ucits (17.9%)
3 Lyxor Asset Management (11.3%)
4 Morgan Stanley (10.2%)
5 Credit Suisse (7.9%)
Ucits platform from investor viewpoint
1 Alpha Ucits (23.9%)
2 Deutsche Bank (21.7%)
3 Lyxor Asset Management (12.0%)
4 Morgan Stanley (10.1%)
5 Credit Suisse (7.4%)
Man announced in its interim management statement for the quarter ended 30 September 2013, that its funds under management (FUM) at 30 September 2013 has reached $52.5 billion with net inflows of $0.7 billion.
“The net inflow in the quarter was driven by institutional flows into discretionary alternatives and long only strategies. Inflows were linked primarily to stronger performance in the first half of the year and were characterized by sizable asset flows from certain customers, albeit into relatively low margin products.” Manny Roman, Chief Executive Officer of Man, said. “The equity rally in July, followed by a sell-off in August, and volatility in financial markets in September provided challenging market conditions for hedge funds, and in particular CTAs. As a result performance in the majority of the AHL and FRM strategies was negative in the quarter, although performance at GLG overall was positive.”
FX movements of positive $1.2 billion in the quarter, driven by the weakening of the US dollar against the Euro and Sterling.
Also in the news, GLG Partners, the investment firm acquired by Man Group in 2010, has started a hedge fund modelled after its flagship European equity pool that will trade the stocks of global companies.
The majority of GLG alternative strategies had positive performance in the quarter, adding $0.3 billion to FUM. GLG long only strategies contributed positive investment movement of $0.4 billion in the quarter. AHL Diversified programme was down 6.6% in the quarter.
A NJ-based investment advisory firm and its owner have been charged by the SEC for “misleading investors in a collateralized debt obligation (CDO) and breaching their fiduciary duties in order to accommodate trades requested by a third-party hedge fund firm whose interests were not necessarily aligned with the debt investors,” the SEC reports.
The SEC alleges that Harding Advisory LLC and Wing F. Chau compromised their independent judgment as collateral manager to a CDO named Octans I CDO Ltd. Harding agreed to give the hedge fund firm rights in the process of selecting and acquiring a portfolio of subprime mortgage-backed assets to serve as collateral for debt instruments issued to investors in the CDO. These rights, which were not disclosed to investors, included the right to veto Harding’s proposed selections during the “warehouse” phase that preceded issuance of the CDO’s debt instruments. The influence of the hedge fund firm led Harding to select assets that its own credit analysts disfavored.
“A collateral manager’s independent selection of assets is an important selling point to potential CDO investors,” said George S. Canellos, co-director of the SEC’s Division of Enforcement. “Investors had a right to know that Harding and Chau had chosen to accommodate the interests of others and abandon their own obligations to act in the best interests of the CDO they advised.”
According to the SEC’s order instituting proceedings, the hedge fund firm was Magnetar Capital LLC, which had invested in the equity of the CDO. Merrill Lynch, Pierce, Fenner & Smith Inc. structured and marketed the CDO, which closed on Sept. 26, 2006. Merrill Lynch, Magnetar, and Harding agreed in the spring of 2006 that Harding would serve as collateral manager for the CDO. Chau understood that Magnetar was interested in investing as the equity buyer in CDO transactions, and that Magnetar’s strategy included “hedging” its equity positions in CDOs by betting against the debt issued by the CDOs. Because Magnetar stood to profit if the CDOs failed to perform, Chau knew that Magnetar’s interests were not necessarily aligned with investors in the debt tranches of Octans I, whose investment depended solely on the CDO performing well.
The SEC’s Enforcement Division alleges that while assembling the collateral for Octans I, Chau and Harding allowed Magnetar an undisclosed influence over the selection process. Harding’s own credit analysis of many of the selected assets was disregarded, and Magnetar’s influence over the portfolio was omitted from materials used to solicit investors for the CDO. Chau and Harding misrepresented the standard of care that Harding would use in acquiring collateral for Octans I.
The SEC’s Enforcement Division further alleges that Harding and Chau breached their advisory obligations to several other CDOs for which they served as investment managers. As a favor to Merrill Lynch and Magnetar, Harding and Chau purchased bonds for those CDOs that Chau and Harding disfavored. In accepting the bonds, Chau wrote in an e-mail to the head of CDO syndication at Merrill Lynch, “I never forget my true friends.”
The insider-trading lawsuit against Rengan Rajaratnam has been delayed due to the ongoing federal government shutdown. Rengan is the younger brother of the now imprisoned hedge fund billionaire Raj Rajaratnam.
Bloomberg reports that the case has been delayed because “Prosecutors in the Rajaratnam case have been unable to access certain evidence held electronically at U.S. Department of Justice facilities in Virginia.”
Rengan Rajaratnam has pleaded not guilty in NY court to charges of conspiring in an insider trading scheme to illegally earn nearly 1.2 million. He has been charged with conspiring with his older brother Raj, to cheat on Wall Street and earn nearly $1.2 million illegally.
Rengan voluntarily surrendered, his lawyer said, flying in from Brazil the day before the hearing. He was released on $1 million bail after Monday’s court appearance.
Rengan was also a portfolio manager at the hedge fund Galleon Group, and the trades for which he was charged resulted in nearly 1.2 million dollars of illegal profit, according to prosecutors. The defendant was charged with six counts of securities fraud and one count of conspiracy, and faces up to 20 years in prison on each of the fraud counts.
Miami Finance Forum and Bilzin Sumberg will be hosting and presenting a panel discussion of certain implications and anticipated market developments resulting from the SEC’s recent rule amendments allowing general solicitation of investors in private placement offerings.
Since Obama’s Jumpstart Our Business Startups Act (JOBs Act), the ban on hedge fund advertising has been lifted. The JOBS Act became law in March 2012 and made the initial recommendation to allow “general solicitation” for private issuers, the law was approved with bipartisan support in both houses of Congress.
The rule went into affect on September 23rd 2013 and so far only 8 hedge funds have filed for the *506c exception:
- Zeus Alpha LP
- Steben Select Multi-Strategy Partners, L.P.
- Force Select LTD
- Big Tree Capital Opportunity Fund I, L.P.
- Big Tree Capital Emerging Markets Fund, L.P.
- Ogee Group LLC
- Steben Select Multi-Strategy Partners, L.P., and,
- Israel Investment Fund LP.
“While hedge funds are finally allowed to advertise, we believe that funds will be cautious in adopting general solicitation.” Evan Rapoport, founder of industry portal HedgeCo.net, said. ”No one wants to be first and sign up to be the regulators’ guinea pig, but I do think that if you work with advertisers that have familiarity with securities regulations, the early adopters have a large opportunity to launch successful campaigns.”
He went on to say: “We believe the first funds to take advantage of the JOBS act will more than likely be some of the largest funds in existence. It is the larger investment companies that can afford the upfront costs associated with rolling out a successful advertising and branding campaign.”
*Rule 506 of Regulation D is considered a “safe harbor” for the private offering exemption of Section 4(2) of the Securities Act. Companies using the Rule 506 exemption can raise an unlimited amount of money. A company can be assured it is within the Section 4(2) exemption by satisfying the following standards:
- The company cannot use general solicitation or advertising to market the securities;
- The company may sell its securities to an unlimited number of “accredited investors” and up to 35 other purchases. Unlike Rule 505, all non-accredited investors, either alone or with a purchaser representative, must be sophisticated—that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment;
- Companies must decide what information to give to accredited investors, so long as it does not violate the antifraud prohibitions of the federal securities laws. But companies must give non-accredited investors disclosure documents that are generally the same as those used in registered offerings. If a company provides information to accredited investors, it must make this information available to non-accredited investors as well;
- The company must be available to answer questions by prospective purchasers;
- Financial statement requirements are the same as for Rule 505; and
- Purchasers receive “restricted” securities, meaning that the securities cannot be sold for at least a year without registering them.
If you are thinking about investing in a Reg D company, you should access the EDGAR database to determine whether the company has filed Form D. . If the company has not filed a Form D, this should alert you that the company might not be in compliance with the federal securities laws.
In a bid to finally end litigation going back to 2009, General Motors will pay out $50 million to hedge funds that believe they were wronged in a 2009 deal with regards to the company’s bankruptcy filing.
In 2012, a trust representing unsecured creditors of ”old” GM filed a lawsuit against GM over payments made to hedge funds in 2009 in exchange for waiving of claims against GM’s Canadian subsidiary. The deal, despite its disclosure in an SEC filing on the day GM sought Chapter 11 protection, could have prompted a reopening of the 2009 case.
Reuters reports: “The agreement ends complex litigation in which hedge funds affiliated with John Paulson and Paul Singer’s Elliott Management agreed to reduce the amount they said they were owed in the bankruptcy of “Old GM.” GM had warned the litigation could put it on the hook for $918 million. That threat was removed by the settlement.”
In the news recently General Motors has been plagued by controversy for its labor practices abroad, its steady outsourcing of production from the United States, and its demands for concessions from its workers.
In a recent and ongoing scandal, the General Motors plant in Colombia reportedly fired roughly 200 workers after they were injured on the assembly line, and in August 2012 negotiations refused to cover even the workers’ medical costs or pension benefits. In protest, a group of the workers has been living in tents outside the U.S. Embassy in Colombia since August 2011, and the president of the workers’ association, ASOTRECOL, went on a 72-day hunger strike from late 2012 to early 2013. General Motors has refused to enter new negotiations with the workers, with GM spokeperson Katie McBride saying that the company’s stance had been “very generous.”
The SEC has awarded more than $14 million to a whistleblower whose information led to enforcement action that recovered substantial investor funds. The award is the largest made by the SEC’s whistleblower program to date.
Payments to whistleblowers are made from a separate fund previously established by the Dodd-Frank Act and do not come from the agency’s annual appropriations or reduce amounts paid to harmed investors. The whistleblower program rewards high-quality original information that results in an SEC enforcement action with sanctions exceeding $1 million, and awards can range from 10 percent to 30 percent of the money collected in a case.
“Our whistleblower program already has had a big impact on our investigations by providing us with high quality, meaningful tips,” said SEC Chair Mary Jo White. “We hope an award like this encourages more individuals with information to come forward.”
The whistleblower, who does not wish to be identified, provided original information and assistance that allowed the SEC to investigate an enforcement matter more quickly than otherwise would have been possible. Less than six months after receiving the whistleblower’s tip, the SEC was able to bring an enforcement action against the perpetrators and secure investor funds.
“While it is certainly gratifying to make this significant award payout, the even better news for investors is that whistleblowers are coming forward to assist us in stopping potential fraud in its tracks so that no future investors are harmed,” said Sean McKessy, chief of the SEC’s Office of the Whistleblower. “That ultimately is what the whistleblower program is all about.”
The U.S. Federal Government has been shut down for the first time in 17 years. Reuters reports that: “A shutdown would not mean a financial free-for-all.” It does however, mean that there are less people in place to review applications to register shares with regulators, including initial public offerings, or offer new financial products, Reuters says. This includes new regulation under the JOBS Act.
“If the budget stalemate in the U.S. Congress leads to an extended federal government shutdown, investors can expect potential interruptions to financial product approvals and new rules, though market oversight would not grind to a halt.” Reuters says.
The SEC would still have an eye on exchange activity, potential insider trading and money market funds. ”The SEC will remain open and operational in the event the federal government undergoes a lapse in appropriations on October 1. Any changes to the SEC’s operational status after October 1 will be announced.” The SEC said.
In U.S. politics, a government shutdown is a situation in which the government stops providing all but “essential” services. Typically, federal services that continue despite a shutdown include the National Weather Service and its parent agencies, medical services at federal facilities, the postal service, armed forces, air traffic management, and corrections (the penal system). A government shutdown is similar to a lockout in the private sector.
President Barack Obama will deliver a statement from the Rose Garden at 12:25 p.m., where he was expected to both address the shutdown and the opening of enrollment for health insurance exchanges under his signature health care law.
In this year’s Forbes 400, the magazine’s annual list of the richest people in the US, are twenty eight hedge fund managers, Forbes magazine reports. To even show up on the 2013 list, one must have over $1.3 billion in net worth, that is up $200 million from 2012′s list. In the first Forbes 400 (1982), there were only 13 billionaires and a net worth as low as $75 million could secure you a spot.
At the top of the list is George Soros whose net worth stands at $20 billion, the firm: Soros Fund Management. In 2010, it was reported to be one of the most profitable firms in hedge fund history, averaging a 20% annual rate of return over four decades.
“Twenty-eight members of the 2013 Forbes 400 built their fortunes through the management of hedge funds.” Forbes reports, “Now making up 7% of America’s wealthiest individuals, their number decreased over the past twelve months from the 31 managers that made the list in 2012, as several legendary investors failed to keep pace with the rising tide of the world’s most exclusive club. Twenty-four of the hedge fund managers that did make the 2013 list got richer over the past year.”
The full list can be accessed here.
Forbes Trivia: Over the first 25 years of the Forbes 400 list, 1,302 different people made the list. 97 immigrants and 202 women (15.5%) made the list in that time. Four of the top five richest people in the United States in 2006 were college dropouts: Bill Gates, Sheldon Adelson, Larry Ellison, and Paul Allen.