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.
A new filing with the SEC shows that Daniel Loeb’s $14 billion hedge fund Third Point LLC spent over $156 million on the acquisition of a 5.7% stake in Sotheby’s.
The well known activist hedge fund Third Point also owns 1% or 1.8 million worth of Disney; 70 million shares, or about 7% of Sony, valued at $1.4 billion. Sony Corp last week rejected Daniel Loeb’s activist idea for a spinoff of part of Sony’s entertainment arm that would have included a Hollywood movie studio and music business. The board unanimously rejected the deal.
Loeb also held 5.8% of Yahoo! stock, Yahoo then bought back 40 million shares of common stock at $29.11 per share.
Third Point also owns four million shares of News Corp, worth some $130.3 million, three million Class A shares of Liberty Global, worth $220.4 million, and two million Class C shares of Liberty Global, worth $136 million.
Loeb “intends to engage Sotheby management in talks,” Reuters said.
“Sotheby’s generated $768.5 million in revenue last year, the bulk coming from the auction business that sells fine wines, art and gems. It holds a record for a work of art at auction: Last year’s sale of Edvard Munch’s “The Scream” for $119.9 million. Its biggest competitor is Christie’s, the London-based company taken private by billionaire Francois Pinault’s holding company, Artemis SA, in 1998.” Bloomberg reports.
Dian Vujovich at the Palm Beach Daily News writes about the recent changes to the Securities Act of 1933, which allows hedge funds to raise money through general solicitation and advertising to the public.
US hedge funds are, for the first time, able to solicit investors freely and advertise their funds through mass media channels, from television adverts to newspapers articles and websites.
“This is obviously a monumental development in the industry, lifting the general solicitation ban for hedge funds.” Evan Rapoport, founder of industry portal HedgeCo.net, said earlier this year in a HedgeCo exclusive. ”It’s easy to imagine a world where the largest hedge funds are purchasing spots on CNBC. The industry has operated since the days of Alfred Winslow Jones under the basis of no general advertising, but I think we are moving closer to a point where hedge funds themselves will resemble the mutual fund industry. We already see transparency mandates causing funds to report holdings, the proliferation of UCITS funds with daily liquidity, and now general solicitations move us one step closer to the inevitable.”
Dian interviewed Evan Rapoport on his views on the repealing of the SEC’s 80-year ban and what investors should be aware of when looking into possible investments. The article came out came out in hard copy in the Sunday Palm Beach Daily News’ ”Shiny Sheet.”
Rapoport said: (source)
* Verify all of the hedge fund’s providers. That means finding out whether the fund has a quality auditor in place and is one that is registered with a Public Company Accounting Oversight Board. This private-sector non-profit organization was created by the Sarbanes-Oxley Act to oversee the auditors of publicly traded companies.
* Contact the fund’s auditor and obtain copies of current and past audits. “You want to review those audits because they’ll tell you things like how much money the fund manages, if the assets they say they have are correct. And give you affirmation on the performance (the fund) is posting,” Rapoport said. “That’s very important.”
* Become familiar with the hedge fund’s administrator and administration firm. The administrator keeps the fund’s month-to-month accounting records and produces the net asset values (account statements) for investors. Sometimes the administration firm also has to sign off on any fund-related money movement. “Money cannot be moved out of accounts, not out of the brokerage accounts, the limited partnership accounts, etc., without the administrator signing off on that money movement,” Rapoport said.
* Ask for a copy of the Due Diligence Questionnaire. In it will be background information about the fund managers, their investment strategy, how they employ that strategy and a list of the fund’s third-party providers.
“It (the questionnaire) will provide you with a wealth of information about the organization as a whole so you can get comfortable with not only the fund and the performance, but the people behind the fund and the strategy that they look to employ.” Rapoport concluded.
David H. Tenney has joined Citi’s Prime Brokerage business as a Managing Director and Regional Head of Sales for the Americas. He will manage the firm’s unified hedge fund sales efforts across Prime Brokerage, Securities Lending and Delta One.
Tenney has 23 years experience in senior management. Most recently, he was a Managing Director and Head of Client Relations at Forester Capital LLC. Prior to Forester Capital, he was a Managing Director at Russell Investments leading its alternative investments business including Hedge Funds, Real Estate, Commodities, Infrastructure and Private Equity.
Tenney also spent 21 years at Goldman Sachs and held a variety of management roles across the firm’s Securities and Investment Research Divisions.
“David brings to Citi over two decades of high-level management and sales experience across the financial services sector,” said David Murphy, Citi’s Head of Prime Finance for the Americas. “We are pleased to have him on board and look forward to having him as part of our integrated services for our hedge fund clients.”
Hedge fund Heathfield Capital Limited has received eighteen pieces of contemporary art including pieces by Andy Warhol, Mark Rothko and Damien Hirst. The artwork has been valued at approximately $33 million.
The New York-based hedge fund was a victim in a $400 million fraud scheme by Manhattan lawyer Marc Dreier, who was sentenced to 20 years in prison for selling $700 million in fake promissory notes to hedge funds in 2009.
Among the allegations, Dreier allegedly marketed bogus promissory notes that included ones tied to a real estate development company based in New York. Prosecutors said Dreier then covered it up by producing phony documentation and false financial statements to keep the investors from discovering the scheme.
According to the prosecution, Dreier convinced hedge funds to purchase these notes by highlighting the discount they would receive due to the original investors facing a cash crunch brought on by the current economic turmoil. Though the hedge funds weren’t specified, prosecutors say that one New York fund wired $100 million to one of Dreier’s accounts, while another fund in Connecticut wired about $13.5 million.
In the newly-created position of Chief Operating Officer, Elliot will focus on implementing AxiomSL’s strategies and realizing company objectives, including exploring partnerships for key expansion and growth initiatives in line with the company business goals. Elliot will report directly to Alex Tsigutkin, AxiomSL CEO.
Earlier in his career, Elliot held a position at Swiss Bank Corporation, which became AxiomSL’s first client to implement its global regulatory platform.
“Gordon is a solid leader dedicated to consistently delivering results with a strong focus on operational excellence. I trust his ability to align AxiomSL’s integrated data-driven solution in addressing our clients’ regulatory needs and to continue our sustainable growth in Europe, Americas and Asia Pacific,” Tsigutkin said.
Gordon received his BS in Computer Science from Rensselaer Polytechnic Institute and his MBA in Financial Management from Pace University.