Securities Law Prof Blog

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

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Thursday, October 14, 2010

SEC Charges Two Florida Hedge Fund Managers with $1 Billion Ponzi Scheme

The SEC charged two Florida-based hedge fund managers and their firms with fraudulently funneling more than a billion dollars of investor money into a Ponzi scheme operated by Minnesota businessman Thomas Petters.  According to the SEC, Bruce F. Prévost and David W. Harrold falsely assured their investors and potential investors that the flow of their money would be safeguarded by collateral accounts and described a phony process for protecting their assets. When Petters was unable to make payments on investments held by the funds they managed, Prévost, Harrold, and their firms concealed it from investors by concocting sham note exchange transactions with Petters, who the SEC charged last year along with an Illinois-based hedge fund manager who also facilitated the scheme.

The SEC's complaint filed in U.S. District Court for the District of Minnesota alleges that Prévost, Harrold, and their firms Palm Beach Capital Management LP and Palm Beach Capital Management LLC invested more than $1 billion in hedge fund assets with Petters while pocketing more than $58 million in fees. Petters promised investors that their money would be used to finance the purchase of vast amounts of consumer electronics by vendors who then re-sold the merchandise to such "Big Box" retailers as Wal-Mart and Costco. In reality, Petters's "purchase order inventory financing" business was merely a Ponzi scheme. There were no inventory transactions. Petters sold promissory notes to feeder funds like those controlled by Prévost, Harrold, and their firms, and Petters used some of the note proceeds to pay returns to earlier investors, diverting the rest of the cash to his own purposes.

http://lawprofessors.typepad.com/securities/2010/10/sec-charges-two-florida-hedge-fund-managers-with-1-billion-ponzi-scheme.html

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