Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Monday, May 12, 2008

Broker Sentenced in First Criminal Case Against Hedge Fund for Market-Timing

Beacon Rock Capital LLC ("Beacon Rock"), a hedge fund located in Portland, Oregon, and Thomas J. Gerbasio ("Gerbasio"), a former registered representative with a registered broker-dealer based in Philadelphia, have been sentenced in connection with the first U.S. criminal case brought against a hedge fund for deceptive market timing. On May 7, 2008, the United States District Court for the Eastern District of Pennsylvania sentenced Gerbasio to one year and one day in prison, two years of supervised release, and ordered him to pay a fine of $7,500. The Judge further sentenced Beacon Rock to three years of probation, and ordered the hedge fund to forfeit $475,905 and to pay a fine of $600,000.

The criminal action began with an Information filed on March 20, 2007, by the U.S. Attorney for the Eastern District of Pennsylvania, charging Beacon Rock and Gerbasio with securities fraud. According to the Information, from December 1999 through November 2003, Gerbasio, while associated with two brokers registered with the Commission, provided brokerage services to Beacon Rock. The Information charged that the primary purpose of this relationship was to permit Beacon Rock, whose primary trading strategies involved market timing, to evade and circumvent controls implemented by mutual funds seeking to restrict market timing or other excessive trading. Gerbasio and others at his direction, engaged in a number of deceptive and fraudulent practices designed to conceal the identity of Beacon Rock and the nature of its trading activity, resulting in more than 26,000 Beacon Rock market timing trades. The U.S. Attorney charged Beacon Rock and Gerbasio with, and the defendants pled guilty to, securities fraud in violation of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. ยง78j(b)] and Rule 10b-5 thereunder [17 C.F.R. 240.10b-5].

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