SEC Goes After Firms Below The Radar

Two recent investigations into hedge funds – A.R. Capital and Opulent Lite – show that the U.S. government is not only interested in the big names that are bending or breaking the rules; it is also prepared to hunt down any smaller funds that it believes are engaged in fraudulent activity.


Government regulators continued their ongoing crackdown on fraud at hedge funds.

On late Wednesday afternoon two separate actions were announced against a total of three hedge fund managers. None of the cases are related to the government’s widening insider trading investigation, which threatens to take down a number of well-known, large firms.

Rather, both targeted funds ran considerably less than the $150 million threshold recently set by the Securities and Exchange Commission for hedge funds that must register with the regulator.

This is significant. It sends a signal to managers of small funds that even if they are not required to register under the SEC’s impending new rule, they will not slip under the regulatory radar.

The government is still willing, able and eager to go after them if they commit fraud or violate SEC disclosure rules.

In Wednesday’s actions, one of them is a criminal case. Igor Levin and Yevgeny Shvartsshteyn, who from 2005 through September 2006 were among the individuals who controlled and operated A.R. Capital, which was the general partner of A.R. Capital Global Fund, pled guilty in Manhattan federal court before U.S. Magistrate Judge Ronald L. Ellis for their roles in a conspiracy to defraud investors of more than $7 million through a fraudulent hedge fund, according to L.P. Preet Bharara (pictured above), the United States Attorney for the Southern District of New York.


According to prosecutors, the pair made false and fraudulent representations, including claims that the ARC Global Fund was a hedge fund that invested primarily in the equity of international real estate companies, and that the fund invested in real estate, oil, gas and other commodities.

“In reality, there were no such investments,” said the announcement, adding that more than $7 million of investor funds were wired to various bank accounts in the Ukraine.

Each of the individuals pled guilty to one count of conspiring to commit mail and wire fraud. They each face a maximum sentence of 20 years in prison and a fine of $250,000.

In a civil administrative proceeding, Neil Godbole agreed to settle charges with the SEC that he hid large trading losses in Opulent Lite, a hedge fund he managed with about $30 million in assets and 70 investors. In this case, the fund actually existed.

According to the SEC, in February 2008 the fund lost $8.3 million. Then, Godbole tried unsuccessfully for the rest of the year to “make up” the loss.

Opulent Lite wound up with a total of $14.5 million in trading losses in 2008. However, the SEC said investors were unaware of the losses throughout the year because Godbole misstated both trading results and the fund’s assets in materials sent to investors.

In February 2009, he finally came clean with investors. The SEC said a majority of investors tried to redeem and by March 2009, the fund was liquidated.

This is yet another case whereby the SEC used disclosure violations to go after a hedge fund. In fact, last month Robert Kaplan, who along with Bruce Karpati are co-chiefs of the SEC’s Asset Management specialized unit, which is charged with focusing on investigations involving hedge funds, private equity funds, mutual funds investment advisors and investment companies, confirmed to Institutional Investor last month that underlying most of the SEC recent surge in cases against hedge funds are disclosure issues.

He said that the SEC’s thinking is that while private funds like hedge funds and PE funds are less regulated than mutual funds, they still have a fiduciary responsibility to their clients. “So much of the relationship between the fund and its investors is driven by fund representations in documents -- including the private placement,” said Kaplan.

And these two new cases are reassurance that size doesn’t matter when it comes to rooting out the bad actors.