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Univ. of Toledo College of Law

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Thursday, April 3, 2008

SEC Files Complaint against UK Hedge Fund Advisor Alleging Market-Timing

The SEC filed a civil action in the U.S. District Court for the Southern District of New York against United Kingdom-based hedge fund adviser Pentagon Capital Management PLC (PCM) and its Chief Executive Officer, Lewis Chester. The complaint alleges that PCM and Chester orchestrated a scheme to defraud mutual funds in the United States and their shareholders through late trading and deceptive market timing. PCM's advisory client, Pentagon Special Purpose Fund, Ltd., obtained approximately $62 million in illicit profits through this scheme, at the expense of U.S. mutual funds and their shareholders. The Commission named the Pentagon Fund as a relief defendant.

The Commission's complaint alleges that from approximately June 1999 through September 2003, PCM actively traded U.S. mutual funds through Pentagon Fund's accounts at numerous broker-dealers in the United States. PCM and Chester routinely engaged in late trading of U.S. mutual funds. PCM placed orders on behalf of the Pentagon Fund, to buy, redeem, or exchange mutual fund shares after the 4:00 p.m. Eastern Time (ET) market close while still receiving the current day's mutual fund price. PCM and Chester also used deceptive techniques to market time U.S. mutual funds. For example, PCM opened numerous accounts for the Pentagon Fund at various U.S. broker-dealers, and split Pentagon Fund trades among these multiple accounts to hide the extent of the Pentagon Fund's trading from mutual fund companies. PCM also used multiple accounts so that when a U.S. mutual fund detected market timing and informed the Pentagon Fund to stop, PCM would simply transfer funds to a new Pentagon Fund brokerage account that the U.S. mutual fund was unaware of, and Pentagon Fund would then resume market timing the same mutual fund.

The complaint seeks as relief a final judgment: (i) permanently enjoining PCM and Chester; (ii) ordering PCM, Chester, and the Pentagon Fund to disgorge their ill-gotten gains and to pay prejudgment interest; and (iii) imposing civil money penalties against PCM and Chester.

http://lawprofessors.typepad.com/securities/2008/04/sec-files-compl.html

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