Lets face it. Many Wall Streeters, especially those in the hedge fund community, are anxiously awaiting the loud thud from the next shoe to drop in the governments ever widening investigation into insider trading.
Sure, a number of individuals have been arrested and charged, including last week when the Justice Department made four more arrests in its insider trading investigation while a fifth pled guilty. But, since Raj Rajaratnam was arrested in October 2009, most of those who have been charged either criminally or civilly have been relative bit players.
Observers are eager to see who the next major hedge fund fish is to be caught. Im talking MEGA fish. Big, household name. (There are rumored names, but I refuse to go there).
Hardly noticed, however, is the fact that very quietly, Federal regulators this week alone brought at least three unrelated cases against hedge funds.
For example, Preet Bharara, the U.S. Attorney for the Southern District of New York announced William Shternfeld and Benjamin Koifman were arrested and charged with securities fraud and wire fraud for their role in a $20 million hedge fund fraud scheme.
Never heard of them.
Federal prosecutors allege from 2004 through September 2006, the pair were among the individuals who sought investments from clients through false representations to A.R. Capital Global Fund, L.P., a hedge fund that received nearly $20 million in investments before being shut down in September 2006.
The government alleges they falsely claimed that the ARC Global Fund was a hedge fund that invested primarily in the equity of international real estate companies and that the ARC Global Fund invested in real estate, oil, gas, and other commodities. It turns out, there were no such investments and nearly $18 million of investor funds were wired to various bank accounts in the Ukraine.
The government also alleges Shternfeld and Koifman concealed their true identities using names other than their own and distributed inflated annual returns to investors in order to coerce investors to place more money into the ARC Global Fund.
Each of the two faces a maximum sentence of 65 years in prison.
The Securities and Exchange Commission has also brought two cases of its own in the past week. On Wednesday, American Pegasus LDG and American Pegasus Investment Management as well as three former key individuals at the firms agreed to settle charges they defrauded investors in a $100 million hedge fund that invested in subprime automobile loans.
The SEC reports that former CEO Benjamin P. Chui and former portfolio manager Triffany Mok who managed the American Pegasus Auto Loan Fund together with former general counsel Charles E. Hall, Jr., engaged in improper self-dealing, misused client assets, and failed to disclose conflicts of interest.
The SEC said in mid-2007, Chui used more than $18 million in loans and advances from the Auto Loan Fund to buy the funds sole supplier of auto loans for himself, Hall, and Mok. This created a pervasive conflict of interest as Chui, Hall, and Mok had a duty to maximize the funds performance while at the same time had an interest in generating profits for the loan supplier they secretly owned, the SEC said in its Order.
The SEC also found that Chui used millions in cash borrowed from the Auto Loan Fund to prop up other hedge funds he managed. In fact, the regulator said by late 2008, about 40 percent of the funds assets consisted of loans to the fund managers related businesses with fund investors being charged fees based on these undisclosed related-party payments.
According to the SEC, Chui, Hall, and Mok wiped much of this debt to the fund off the books by selling assets to the fund at a 300 percent mark-up.
Without admitting or denying the SECs findings, Chui agreed to pay a $175,000 penalty and be barred from associating with an investment adviser for five years. Hall agreed to pay a $100,000 penalty and be barred from associating with an investment adviser for three years and from appearing or practicing before the Commission as an attorney for three years. Mok agreed to pay a $75,000 penalty and be suspended from associating with an investment adviser for one year. The two adviser firms must disgorge $850,000 in management fees deemed improper by the SEC.
Also this week, the SEC filed a civil injunctive action against Robert Buckhannon, Terry Rawstern, Dale St. Jean and Gregory Tindall, the four managing members of two now-defunct hedge funds, Arcanum Equity Fund, LLC and Vestium Equity Fund, LLC, through which they conducted an offering fraud that raised $34 million from 101 investors.
The SEC also charged Imperium Investment Advisors, LLC, a registered investment adviser that served as trustee for Vestium Equity Fund, and its three principals, Richard Mittasch, Christopher Paganes and Glenn Barikmo, for their roles in the scheme.
The SEC alleges that from April 2008 through April 2010, the Managing Members raised funds promising investors that they would generate substantial returns through conservative investments in high-grade debt instruments and, in some cases, limited physical commodities transactions. It also alleges the offering materials and prospectus for Vestium Equity Funds assured investors that Imperium would safeguard their funds from impermissible uses.
Instead, the SEC claims the individuals disregarded the funds' respective investment parameters and used investor funds for illiquid private investments and loans to affiliate entities.
Whats more, although the funds lost at least $8.1 million, the Managing Members sent out monthly statements falsely reporting profits and paid at least $6 million to investors in alleged profits. They then paid themselves over $1.3 million in compensation that the SEC says was improperly based on inflated asset values and fictitious profits. The SEC also alleges that Buckhannon, Mittasch, Paganes and Barikmo collectively misappropriated at least $734,000 of investor funds to themselves and others.
Without admitting or denying the SEC's allegations, Buckhannon settled the Commission's action by agreeing, among other things, to disgorge $1.2 million and pay a $130,000 civil penalty. Rawstern also partially settled the Commission's action by consenting to the entry of a judgment providing for injunctive relief and for the imposition of disgorgement and a civil penalty, with the amounts to be determined at a later date.
Still waiting for those blockbuster names. Guess they will be able to enjoy the holidays, at the very least.