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Tuesday, March 2, 2010

SEC Settles Fraud Charges Against Hedge Fund Adviser

On March 2, 2010, the SEC settled administrative charges against Sharath Sury (Sury), the former Chief Executive Officer of S4 Capital, LLC, and against S4 Capital, LLC (S4 Capital), an investment adviser registered with the Commission.

The SEC alleged that from December 2005 to February 2006, Sury caused an unregistered hedge fund managed by S4 Capital to engage in undisclosed, unhedged, high-risk trading, primarily in Google stock options, which resulted in substantial losses to the fund. In addition, Sury failed to disclose to investors in the hedge fund with whom S4 Capital had investment advisory agreements, that Sury was engaging in risky, unhedged trading that was contrary to the investment strategy described in the hedge fund's private placement memorandum and their personal investment objectives and that the fund was suffering mounting losses. According to the SEC, Sury's undisclosed high-risk trading caused the hedged fund to lose all of its assets, totaling approximately $12 million, in about two months time.

The SEC Orders find that as a result of this conduct, S4 Capital and Sury willfully violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder. The Orders further finds that S4 Capital willfully violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940, and that Sury willfully aided and abetted and caused S4 Capital's violations of Sections 206(1) and 206(2) of the Advisers Act.

Based on the above, the Order against Sury: (1) orders Sury to cease and desist from committing or causing any violations and any future violations Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Advisers Act; (2) bars Sury from association with any broker, dealer, or investment adviser and is prohibited from serving or acting as an employee, officer, director, member of an advisory board, investment adviser, or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter, with the right to reapply for association after two years to the appropriate self-regulatory organization, or if there is none, to the Commission; and (3) orders Sury to pay a civil penalty in the amount of $130,000 to the United States Treasury. The Order against S4 Capital: (1) orders S4 Capital to cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Advisers Act.; (2) censures S4 Capital; and (3) orders S4 Capital to undertake to wind down its operations and to file a Form ADV-W within six months from the date of the entry of the Order Against S4 Capital and to ensure that Sury will have no association with S4 Capital or any entities controlled by it during the period that Sury is barred; and (4) does not impose a civil penalty based on S4 Capital's sworn representations in its statement of financial condition. Sury and S4 Capital consented to the issuance of the orders against them without admitting or denying any of the findings in the Orders, except as to the Commission's jurisdiction over them and the subject matter of the proceedings, which they admitted.

http://lawprofessors.typepad.com/securities/2010/03/sec-settles-fraud-charges-against-hedge-fund-adviser.html

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