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

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Tuesday, December 21, 2010

SEC Charges Investment Adviser Firms and former Officers with Hedge Fund Fraud

The SEC charged two San Francisco-based investment adviser firms along with their former CEO, former general counsel, and former portfolio manager with defrauding investors in a $100 million hedge fund that invested in subprime automobile loans.  The SEC found that former CEO Benjamin P. Chui and former portfolio manager Triffany Mok — who managed the American Pegasus Auto Loan Fund — together with former general counsel Charles E. Hall, Jr., engaged in improper self-dealing, misused client assets, and failed to disclose conflicts of interest.

The firms — American Pegasus LDG and American Pegasus Investment Management —and Chui, Hall, and Mok settled the SEC’s charges by agreeing to sanctions including bars from the industry and more than $1 million in penalties and repayments to the fund.

The SEC’s order instituting administrative proceedings finds that unbeknownst to investors, in mid-2007, Chui used more than $18 million in loans and advances from the Auto Loan Fund to buy the fund’s sole supplier of auto loans for himself, Hall, and Mok. This created a pervasive conflict of interest as Chui, Hall, and Mok had a duty to maximize the fund’s performance while at the same time had an interest in generating profits for the loan supplier they secretly owned.

The SEC also found that Chui used millions in cash borrowed from the Auto Loan Fund to prop up other hedge funds he managed. By late 2008, roughly 40 percent of the Auto Loan Fund’s assets consisted of “loans” to the fund managers’ related businesses — with fund investors being charged fees based on these undisclosed related-party payments.

According to the SEC’s order, Chui, Hall, and Mok then essentially wiped much of this debt to the fund off the books by selling assets to the fund at a 300 percent mark-up. Chui, with help from Hall and Mok, purchased an auto loan portfolio for $12 million in February 2009 — then sold it to the Auto Loan Fund the same day for more than $38 million. The fraudulently inflated sale was used to erase money owed to the fund for the various related-party transactions.

The Commission’s order finds violations of multiple antifraud statutes by Chui, Hall, Mok, and their two adviser firms. Without admitting or denying the SEC’s findings, the respondents agreed to the following settlement terms. Chui, who lives in San Carlos, Calif., agreed to pay a $175,000 penalty and be barred from associating with an investment adviser for five years. Hall, who lives in Carlisle, Penn., agreed to pay a $100,000 penalty and be barred from associating with an investment adviser for three years and from appearing or practicing before the Commission as an attorney for three years. Mok, who lives in Fremont, Calif., agreed to pay a $75,000 penalty and be suspended from associating with an investment adviser for one year. The two adviser firms must disgorge $850,000 in management fees deemed improper by the SEC.

http://lawprofessors.typepad.com/securities/2010/12/sec-charges-investment-adviser-firms-and-former-officers-with-hedge-fund-fraud.html

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