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Univ. of Toledo College of Law

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Monday, March 2, 2009

SEC Sanctions Investment Adviser for Taking Warrants from Hedge Fund Clients

The SEC announced that it sanctioned M.A.G. Capital, LLC (M.A.G.), a Los Angeles registered investment adviser, and David F. Firestone, its president and sole owner, for taking warrants from three hedge funds that it advises (the Funds) without compensating the Funds for them. M.A.G. and Firestone agreed to settle the charges, without admitting or denying the Commission's findings, by agreeing to the issuance of a censure, a cease-and-desist order, and payment of civil penalties of $100,000 and $50,000, respectively.

On forty-four separate occasions between May 2003 and September 2006, M.A.G. took warrants from the Funds without compensating the Funds for them. The Funds had purchased the warrants and other securities in PIPEs transactions (private investment in public equity). As part of these transactions, M.A.G. took, as compensation for itself, warrants that were being paid for by its clients, the Funds. M.A.G. did not adequately disclose that the warrants that M.A.G. took were being paid for by the Funds and that M.A.G. was not compensating the Funds for these warrants. The net value of the warrants retained by M.A.G. was approximately $18.9 million. Firestone instituted the warrant-taking practice and knew that M.A.G. did not compensate the Funds for the warrants that it took.

M.A.G. and Firestone consented to the issuance of an order which censures them and orders them to cease and desist from committing or causing violations and any future violations of Section 206(2) of the Investment Advisers Act of 1940, and to pay civil penalties of $100,000 and $50,000, respectively. The Commission considered remedial acts promptly undertaken by M.A.G. and Firestone and the cooperation they afforded the Commission staff in its investigation. (Rel. IA-2849; File No. 3-13387)

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