FINANCIAL CRIME NEWS
HEDGE FUND FRAUD NEWS STORIES
By Stephanie Ayres
8 December 2005
Chicago, Illinois
Edward Thomas Jung, the former manager of the Strategic Income Fund LLC hedge fund, was sentenced to 109 months in federal prison and payment of $21 million of restitution to investors defrauded through his actions in providing false information about his trading performance. Jung had also been accused of taking investor money to back his personal trading.
In addition to his role as hedge fund manager, Jung had also been a principal in ETJ Partners Ltd., a broker-dealer whicih Jung used for options trading in the course of the fraud. ETJ was named with him as a defendant in an SEC civil case over the same dealings. That case resulted in ia permanent injunction against future violations in March 2002 and in Jung being barred from association with broker-dealers by the SEC. The administrative action against ETJ resulted in the SEC’s revocation of ETJ’s broker-dealer registration.
By Stephanie Ayres
2 December 2005
Philadelphia, Pennsylvania
Reports filed recently by C. Clark Hodgson, the court-appointed receiver for collapsed hedge fund Philadelphia Alternative Asset Management Company LLC (PAAM) describe a series of unusual attempts by the fund’s former operator, Paul Eustace, to reverse his Canadian bankruptcy case proceedings and by a group of big bank investors to transfer control of the fund’s proceedings offshore to the Cayman Islands.
Of the hundreds of millions of investor dollars in limbo as PAAM was placed into receivership on June 23, investigators quickly located accounts holding over $37 million at UBS Securities Ltd and about $31.5 million at Man Financial. Forensic accountants hired by Hodgson reported that investor funds had been traced from PAAM’s account at PNC Bank to Option Capital LP and Paul Eustace. About $5 million was frozen in accounts at Velocity Futures LP, an entity believed to have received funds through Option Capital. According to the receiver’s first report (August 1, 2005), the frozen Velocity accounts were in Eustace’s name.
Eustace filed bankruptcy in Canada in July 2005. The trustee handling his case reportedly sought control of some of the PAAM receivership assets. Hodgson opposed this attempt in a series of legal maneuvers that ended with the Canadian trustee’s resignation and Eustace’s alleged attempts to annul his own bankruptcy case, apparently to avoid the creditor claims exceeding $200 million which the PAAM receivership had filed against him.
Meanwhile, more unusual developments were underway in the investigation of PAAM’s offshore fund. The forensic accountants reported following a trail from PAAM’s account at PNC to UBS and Man Financial, where they discovered what the receiver later claimed in court filings to be a secret account ( the so-called “50 Account”) which had been used to collect and hide the fund’s growing losses from investors.
Hodgson’s October 18 court filing says that at the time of his appointment, the secret “50 Account” had accumulated a total deficit of about $179M. Analysis of all the transfers between this account and PAAM’s official Man Financial account, called the “10 Account,” were still incomplete at the fime of this filing. Man Financial’s failure to turn over all of the records related to the PAAM accounts requested by the receiver resulted in a motion filed by Hodgson asking the US District Court in Philadelphia to find Man Financial in contempt.
In his court filing, Hodgson claimed to have been caught unawares with no advance notice when a group of large PAAM investors filed an ex parte motion in the Grand Court of the Cayman Islands asking that court to take over control of the PAAM Offshore fund. The receiver claimed that notice of this action went only to former PAAM directors who had already resigned, instead of to the receivership.
The investor motion reportedly asked the Cayman court to appoint its own liquidator for the Offshore Fund. Signing off on this offshore motion were a group of large banks, either in their own right or on behalf of beneficial interests including BNP Paribas and Citgo Global on behalf of Fortune Group and Fortune Asset Management; Citgo Global for the benefit of Santa Barbara Market Neutral Fund and Santa Barbara Alpha Strategies; Rothschild Bank for the benefit of RMB Multi Managers; and SG Private Bank for the benefit of Weston Capital. On behalf of the PAAM receivership in Pennsylvania, Hodgson argued that the Cayman motion was not relevant because the PAAM had no assets there and the Cayman court would thus not have jurisdiction.
By Stephanie Ayres
21 November 2005
Miami, Florida
The SEC announced on September 29 that a default judgment has been awarded in Florida federal court in its case against Won Sok Lee and Yung Bae Kim, the operators of defunct hedge fund KL Group LLC and several affiliate entities. Lee and Kim disappeared before the SEC complaint was filed in March.
KL Group was created in 2001 by Lee, a resident of Singer Island, Florida and by Kim of Irvine, California. John Kim of Jupiter, Florida was identified in the complaint as head portfolio manager of KL Group Fund, KL Financial Group DB Fund, KL Financial Group DC Fund, KL Florida Fund, and KL Triangulum Fund. Securities trading was carried out for the KL funds through Shoreland Trading LLC, a registered broker-dealer.
According to the SEC complaint, Lee and Yung Bae Kim marketed the hedge funds in meetings, ads, and by internet as having a “sophisticated proprietary trading system” devised by John Kim, said to be a former Wall Street trader with a record of profitable trading. The KL funds raised at least $81 million from over 300 investors, not all of whom were the wealthy “accredited” investors that the KL fund marketing materials claimed were the only eligible participants.
Contrary to the claims in materials sent to investors of returns averaging over 100% per year, the KL fund operators were accused of losing most of the investors’ money in what the SEC described as “disastrous trading,” then sending false statements to the investors allegedly to conceal the true status of their accounts.
The default judgment against Lee and Yung Bae Kim announced on September 29 calls for a permanent injunction against future securities law violations, disgorgement of illegal profits, and civil penalties with the amounts to be determined later.
By Stephanie Ayres
24 October 2005
Los Angeles, California
The California Department of Corporations (DoC) announced it issued a Desist and Refrain Order on July 11 barring Keith Gilabert of Valencia from further activity in California as an investment advisor through his Capital Management Group Holding Company LLC.
Gilabert’s Capital Management Group had served as general partner for a hedge fund called CGT Venture Fund LP. Capital Management Group had been licensed for investment advisory activity since July 2000. In September 2000 it filed a notice announcing that the GLT Fund was planning to raise some $100 million through the sale of partnership interests.
The DoC revoked Capital Management Group’s investment advisory license in August 2003 and alleged in its order that Gilabert continued to act through Capital Management as advisor to the GLT fund after the revocation.
By Stephanie Ayres
12 July 2005
Arlington, Virginia
On June 23 the SEC announced a settlement in its case against fund manager Simon A. Hershon and his IBF Collateralized Finance Corporation, an entity he created in 1996 to buy nonperforming loans from the S&L “bailout” agency, Resolution Trust Corporation, and other sellers of bad loans with the idea of making arrangements to restructure the debts and to resell the loans at a profit.
According to the SEC’s complaint filed in July 2002, a shortage of such loans apparently prompted Hershon to begin using fund capital to originate loans for what were described as “high-risk hotel development and acquisition loans,” through a group of related companies called the InterBank companies.
Even as Hershon’s funds were making the transition from buying distressed mortgage loans to becoming a financier in various industries, he expanded to loans of $20 million to US Mills, $11 million to pension administrator Investment and Benefit Services Inc., $7 million to Tuned-In Sports, a sporting goods company, with more investor funds flowing to interests in hotels, beach resorts, a factoring company, financial services, and motion picture production.
According to the SEC complaint, Hershon and IBF raised about $195 million from 3,100 investors between 1996 and 2002 through the sale of “unsecured subordinated high-yielding notes” and channeling loan activities through three special-purpose corporations. The complaint alleged that tens of millions of dollars were shuffled among these entities to conceal cash flow gaps and large losses that went undisclosed ot investors. The IBF funds’ financial statements also reportedly overstated the funds’ net income.
In November 2002 a court ruling found that two Hershon funds – IBF Collateralized Finance Corporation and IBF VI Secured Lending Corporation – had violated the Investment Company Act of 1940 by failing to register as investment funds. The court rejected their claim to be exempt from registration because their investment activity was supposedly concentrated in mortgage-backed securities (MBS).
According to an SEC statement of December 2, 2002, this claim had resulted from the funds’ purchase of interests in two MBS-issuing trusts for a “nominal sum.” The IBF funds had then allegedly recorded all the trusts’ mortgage loans – a staggering $674 million – on their books although the IBF funds didn’t own these mortgage loans directly.
The final settlement announced in June calls for Hershon to disgorge $400,000 and pay a $500,000 civil penalty. The IBF fund will be subject to an injunction against future violations.
In a related administrative proceeding, the SEC ordered Hershon to cease and desist the allegedly fraudulent activity and barred him from associating with an investment advisor or employment with a registered investment company for four years.
FINANCIAL CRIME NEWS
© STEPHANIE AYRES 2004-2017 ALL RIGHTS RESERVED
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