Securities Law Prof Blog

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

Saturday, September 13, 2008

Investment Adviser Settles Charges it Defrauded Ohio Workers' Compensation Fund

The SEC filed securities fraud charges in the United States District Court for the Western District of Pennsylvania against Mark D. Lay and MDL Capital Management, Inc. ("MDL Capital"), an investment adviser.  Lay was the Chairman, CEO and Chief Investment Strategist of MDL Capital and part-owner of MDL Capital. The complaint alleges that, between February 2004 and November 2004, Lay and MDL Capital defrauded the Ohio Bureau of Workers' Compensation in connection with the Bureau's investment of public money in the MDL Active Duration Fund, Ltd., a hedge fund affiliated with and managed by Lay and MDL Capital. The Bureau transferred approximately $200 million from its advisory account managed by MDL Capital and Lay to the hedge fund pursuant to an agreement that those assets would be conservatively leveraged.

The Complaint further alleges that MDL Capital and Lay exposed Bureau funds to unauthorized and undisclosed risk by substantially exceeding a 150% leverage guideline, at one point using leverage of over 21,000% in the hedge fund. As a result, the Bureau incurred losses of approximately $160 million. During the course of the fraud, Lay repeatedly lied to and misled the Bureau as to the reasons for and amount of the losses as well as the excessive leverage Lay was using.

In October 2007, based on these same facts, Lay was convicted in the Northern District of Ohio of criminal mail fraud, wire fraud and investment adviser fraud. Lay is currently serving a 12 year prison sentence.  Without admitting or denying the allegations of the Complaint, Lay and MDL Capital have consented to the entry of a final judgment permanently enjoining them from engaging in the violations set forth below, and ordering other relief.

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