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.
One of the founders of New York hedge fund firm Vicis Capital is under fire by the SEC for engineering an undisclosed transaction in which he had a financial conflict of interest. Without admitting or denying the charges, Stastney agreed to pay more than $2.9 million to settle the SEC’s charges.
The SEC alleges that Stastney traded as a principal when he authorized the client hedge fund to pay approximately $7.5m to purchase a basket of illiquid securities from a personal friend and outside business partner hired by the firm as a managing director.
“Fund advisers cannot sit on both sides of a transaction as buyer and seller without the consent of the clients who rely on them for unbiased investment advice,” said Julie M. Riewe, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “Stastney failed to live up to his fiduciary duty when he unilaterally set the terms of the transaction and authorized it without disclosing that he would personally profit from it.”
On top of the $2.9 million fine, the SEC’s order bars the Marlboro, NJ hedge fund adviser from association with any investment company, investment adviser, broker, dealer, municipal securities dealer, or transfer agent for at least 18 months. Stastney will be permitted to finish winding down the fund under the oversight of an independent monitor payable at his own expense.
Hedge fund manager and alternative investor specialist Morgan Creek Capital Management is launching its first open end alternative mutual fund, the Morgan Creek Tactical Allocation Fund.
“Investors in the Tactical Allocation Fund may benefit from a flexible investment approach designed with the goal of capitalizing on uncorrelated investment strategies that seek to dampen portfolio volatility and reduce risks,” said Mark W. Yusko, Chief Investment Officer of Morgan Creek. “The fund features a broadly diversified global portfolio, actively managed utilizing a multi-asset class investment strategy with daily liquidity.”
The investment objective of the Fund is to provide long-term total returns while utilizing a strategy that seeks lower volatility than a traditional portfolio of equities and fixed income securities, Morgan Creek said in a statement. The Fund’s multi-strategy, multi-asset class structure allows it to dynamically shift capital to pursue and attempt to take advantage of potential investment opportunities identified by Morgan Creek’s investment team, seeking to appropriately hedge risks in the market in an effort to minimize losses in times of stress.
In one of the largest crackdowns in the industry, the SEC has taken legal action against 23 firms and hedge fund managers for short selling violations. The funds agreed to pay $14.4 million to settle the market manipulation charges, the Wall Street Journal reports.
“The benchmark of an effective enforcement program is zero tolerance for any securities law violations, including violations that do not require manipulative intent,” said Andrew J. Ceresney, Co-Director of the SEC’s Division of Enforcement. “Through this new program of streamlined investigations and resolutions of Rule 105 violations, we are sending the clear message that firms must pay the price for violations while also conserving agency resources.”
The SEC charged the following firms in this series of settled enforcement actions:
Blackthorn Investment Group – Agreed to pay disgorgement of $244,378.24, prejudgment interest of $15,829.74, and a penalty of $260,000.00.
Claritas Investments Ltd. – Agreed to pay disgorgement of $73,883.00, prejudgment interest of $5,936.67, and a penalty of $65,000.00.
Credentia Group – Agreed to pay disgorgement of $4,091.00, prejudgment interest of $113.38, and a penalty of $65,000.00.
D.E. Shaw & Co. – Agreed to pay disgorgement of $447,794.00, prejudgment interest of $18,192.37, and a penalty of $201,506.00.
Deerfield Management Company – Agreed to pay disgorgement of $1,273,707.00, prejudgment interest of $19,035.00, and a penalty of $609,482.00.
Hudson Bay Capital Management – Agreed to pay disgorgement of $665,674.96, prejudgment interest of $11,661.31, and a penalty of $272,118.00.
JGP Global Gestão de Recursos – Agreed to pay disgorgement of $2,537,114.00, prejudgment interest of $129,310.00, and a penalty of $514,000.00.
M.S. Junior, Swiss Capital Holdings, and Michael A. Stango – Agreed to collectively pay disgorgement of $247,039.00, prejudgment interest of $15,565.77, and a penalty of $165,332.00.
Manikay Partners – Agreed to pay disgorgement of $1,657,000.00, prejudgment interest of $214,841.31, and a penalty of $679,950.00.
Meru Capital Group – Agreed to pay disgorgement of $262,616.00, prejudgment interest of $4,600.51, and a penalty of $131,296.98.00.
Merus Capital Partners – Agreed to pay disgorgement of $8,402.00, prejudgment interest of $63.65, and a penalty of $65,000.00.
Ontario Teachers’ Pension Plan Board – Agreed to pay disgorgement of $144,898.00, prejudgment interest of $11,642.90, and a penalty of $68,295.
Pan Capital AB – Agreed to pay disgorgement of $424,593.00, prejudgment interest of $17,249.80, and a penalty of $220,655.00.
PEAK6 Capital Management – Agreed to pay disgorgement of $58,321.00, prejudgment interest of $8,896.89, and a penalty of $65,000.00.
Philadelphia Financial Management of San Francisco – Agreed to pay disgorgement of $137,524.38, prejudgment interest of $16,919.26, and a penalty of $65,000.00.
Polo Capital International Gestão de Recursos a/k/a Polo Capital Management – Agreed to pay disgorgement of $191,833.00, prejudgment interest of $14,887.51, and a penalty of $76,000.00.
Soundpost Partners – Agreed to pay disgorgement of $45,135.00, prejudgment interest of $3,180.85, and a penalty of $65,000.00.
Southpoint Capital Advisors – Agreed to pay disgorgement of $346,568.00, prejudgment interest of $17,695.76, and a penalty of $170,494.00.
Talkot Capital – Agreed to pay disgorgement of $17,640.00, prejudgment interest of $1,897.68, and a penalty of $65,000.00.
Vollero Beach Capital Partners – Agreed to pay disgorgement of $594,292, prejudgment interest of $55.171, and a penalty of $214,964.
War Chest Capital Partners – Agreed to pay disgorgement of $187,036.17, prejudgment interest of $10,533.18, and a penalty of $130,000.00.
Western Standard – Agreed to pay disgorgement of $44,980.30, prejudgment interest of $1,827.40, and a penalty of $65,000.00.
“Twenty-two of the firms have agreed to settle the civil charges, though they did not admit or deny wrongdoing. G-2 Trading is fighting the charges.” The Wall Street Journal reported.
The SEC’s Rule 105 of Regulation M prohibits the short sale of an equity security during a restricted period – generally five business days before a public offering – and the purchase of that same security through the offering. The firms charged in these cases allegedly bought offered shares from an underwriter, broker, or dealer participating in a follow-on public offering after having sold short the same security during the restricted period.
Hedge fund manager and former Penn State tight end, Paul Pomfret has been sentenced to 63 months’ imprisonment in federal court in Columbia. He pleaded guilty to wire fraud in May, his Palm Beach-based hedge fund PDP Capital has been involved in several legal battles starting in 2004.
The Palm Beach Post covered the charges:
Federal prosecutors last year accused Pomfret of defrauding a South Carolina businessman of $500,000. The unnamed victim met Pomfret in the Cayman Islands in 2010 and agreed to invest in Pomfret’s hedge fund, PDP Capital Investments of Palm Beach, prosecutors said.
Pomfret, 49, issued a phony statement showing profits in the victim’s account. In fact, prosecutors said, Pomfret never invested the money but spent it himself.
The money was not invested in Pomfret’s funds but went to pay off two previous investors, the prosecution said. At that point, in fact, the fund of funds was largely shut down, and most of the money received by Pomfret was tied up in a beach house and promissory notes. All of the $500,000 investment eventually was lost.
Pomfret was ordered to pay over $1.6 million to various victims.
Palm Beach is no stranger to fraud. KL Group was one of the first big cases of hedge fund fraud in 2005, followed by the infamous Madoff Scandal of 2008, to the Palm Beach Capital debacle in 2010.
Hedge funds witnessed slightly negative returns in August according to this month’s Eurekahedge Hedge Fund Index, which was down 0.23%. Global hedge fund AUM declined by $6.3 billion, but on the bright side, launch activity picked up the pace with more than 500 funds launched globally year-to-date.
“Risk aversion returned to global markets in August driven by a host of factors.” Eurekahedge said, “The increased likelihood of the United States waging another war in the Middle East, weakening economic situation in emerging markets and continued concerns of QE tapering by the US Federal Reserve (Fed) were the main drivers of the negative market sentiment during the month.”
Other highlights in the August report include:
- Asia ex-Japan hedge funds outperform underlying markets by 10% August year-to-date
- Assets in long/short equity hedge funds crossed the $600 billion for the first time since 2008
- Distressed debt investing remains the best performing strategy in 2013, up 9.77% as at end-August
- Japanese hedge funds outperformed the Nikkei 225 for the fourth consecutive month, up 18.82% year-to-date
- As at 2013 year-to-date, Eurekahedge is tracking more than 600 funds that have delivered over 15% and 200 funds that are up more than 30%
- Eurekahedge CTA/Managed Futures Hedge Fund Index witnessed fourth consecutive month of negative returns in August, down 0.43% during the month
Returns were mixed among the various regional mandates with Latin American and North America hedge funds delivering the strongest returns.
Total assets under management (AUM) declined by $6.3 billion during the month, bringing the size of the industry to $1.90 trillion. Most of the negative impact on total assets came from negative performance in August as managers lost $4.7 billion over the course of the month. The industry also witnessed net negative asset flows of $1.62 billion during the month.
Hedge funds have cut down on their bullish bets on West Texas Intermediate (WTI) crude now that the risk of disruption in Middle East oil exports has been diminished, Bloomberg reports.
“The last few weeks, the market has been in a Syria-headline-driven bubble,” a source told Bloomberg, “Now that the talk has gone from hawkish to dovish, the Syria premium is getting excised from the market.”
WTI is now at two-week low now that the US ans Russia are working together in an effort to eliminate Syria’s chemical weapons cache.
“Money managers reduced net-long positions, or wagers that prices will increase, by 5.2 percent to 290,058 futures and options combined in the seven days ended Sept. 10, the Commodity Futures Trading Commission’s Commitments of Traders report showed Sept. 13. That was the lowest level since July 9.” Bloomberg says.
In an updated report, the news source said that also falling is Brent crude, which: ”Fell to its lowest in four weeks on signs that the threat of imminent military strikes against Syria is receding as the U.S. pursues a plan to confiscate the nation’s chemical weapons.”
Hedge fund founder and adviser Fredrick Douglas Scott, one of Ebony magazine’s “Top 30 under 30,” has pleaded guilty to engaging in a wire fraud conspiracy to steal over $1 million from investors and lying to officials from the SEC.
Scott was the CEO of ACI Capital Group LLC., an investment adviser registered with the SEC since July 2011. He was arrested in June of this year.
“Fredrick Douglas Scott admitted that he used ACI Capital to steal his clients’ investments and fund his own lavish lifestyle.” Attorney Loretta E. Lynch said. “Rather than the historic figure he presented to the media, Scott stands revealed as a common thief who lied his way into his investors’ pockets and then continued his web of lies when confronted by the SEC. Scott has now been brought to justice for lying, cheating, and stealing for his own personal financial gain.”
“Scott told brazen lies about the value of ACI’s assets under management and its ability to deliver huge returns on various investments,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. ”Our examination and enforcement staff aggressively pursue investment advisers who flout the registration provisions of the securities laws for their personal gain, especially those who attempt to cover up their misdeeds by flat-out lying to our examiners.”
According to documents filed in this case, Scott touted his bona fides as an investor to potential clients, including distributing the May 2010 issue of Ebony magazine that described him as “the youngest African-American hedge fund founder in history,” in reality, Scott used ACI to execute his fraudulent scheme, causing more than $1 million dollars in losses.
Scot preyed on his own community, saying at the time of the launch: “My goal is to redefine and advocate for economic sustainability and wealth creation in our community,” Scott said, “The minority banking industry, more specifically the African-American owned banking segment, is fragmented and under tremendous pressure from larger and more robustly capitalized mainstream competitors who have embraced the growing diversity of the marketplace. I believe that, in addition to capital, I can contribute fresh energy and new strategies that would improve the competitive posture of African-American owned banking and financial services businesses, as well as advance the mission of multi-generational economic strength and wealth creation in our community.”
Once victims wired money to ACI, Scott stole the funds for his personal use. Bank records show that Scott used client funds to finance his lifestyle, purchasing expensive personal items and wiring stolen client funds directly into his personal checking account.
Scott faces up to 20 years’ imprisonment on the fraud charge and five years’ imprisonment on the false statement charge. Scott also faces a fine equal to double the investors’ losses, mandatory restitution of $1,338,770 to the victims, and forfeiture of assets.