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

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Saturday, July 11, 2009

SEC Alleges Illinois Hedge Fund Manager Invested $2 Billion in Ponzi Scheme

The SEC announced fraud charges and an asset freeze against a hedge fund manager and his firm for facilitating a multi-billion dollar Ponzi scheme operated by Minnesota businessman Thomas Petters.  The SEC's complaint, filed in U.S. District Court for the District of Minnesota, alleges that Gregory Bell and Lancelot Management LLC invested more than $2 billion in hedge funds assets with Petters and pocketed millions of dollars in fraudulent fees at the expense of investors in the funds. The SEC's complaint also charges Petters with fraud for perpetrating the massive Ponzi scheme through the sale of notes related to consumer electronics. When Petters's scheme began to unravel, Bell participated in a series of sham transactions to conceal that Petters owed more than $130 million in investor payments on the notes.

Bell, Lancelot Management, and the hedge funds they manage have never been registered with the SEC or any other regulatory agency.

The United States District Court, District of Minnesota, issued a court order freezing all assets of Bell and Lancelot Management as well as relief defendants, including Bell's wife Inna Goldman. Among other things, the court order requires that they repatriate all overseas assets to the United States. Petters was previously charged by the U.S. Attorney for the District of Minnesota in early October 2008, and his assets were frozen at that time. He is in custody awaiting trial.

According to the SEC's complaint, Petters carried out his Ponzi scheme from as early as 1995 through September 2008, promising investors that proceeds from the notes they were sold would be used to finance the purchase of vast amounts of consumer electronics by vendors who then re-sold the merchandise to "Big Box" retailers including such well-known chains as Wal-Mart and Costco. Instead, the "purchase order inventory financing" business was a complete sham, and the vendors secretly returned most investor money back to Petters, who diverted billions of dollars for his own purposes.

The SEC alleges that Petters sold the notes to several feeder funds that in turn raised their investment capital from hundreds of private investors in the U.S. and abroad. Beginning in 2002, Bell and Lancelot Management raised approximately $2.62 billion from hundreds of investors through the sale of interests in three hedge funds they managed (Lancelot Investors Fund, L.P., Lancelot Investors Fund II, L.P., and Lancelot Investors Fund, Ltd.). The investors included individuals, retirement plans, individual retirement accounts, trusts, corporations, partnerships, and other hedge funds. Bell and Lancelot Investment used almost all of the fund assets to purchase notes offered by Petters and his companies.

The SEC seeks entry of a court order of permanent injunction against Bell, Lancelot Management and Petters, as well as an order of disgorgement, including prejudgment interest and financial penalties. The SEC also seeks an order requiring the relief defendants to disgorge all ill-gotten gains and pay prejudgment interest.

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