Securities Law Prof Blog

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

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Monday, April 11, 2011

SEC CHARGES FORMER CFO OF INVESTMENT ADVISER WITH AIDING AND ABETTING FRAUD IN CONNECTION WITH UNAUTHORIZED TRANSFERS OF MORE THAN $870 MILLION IN CLIENT FUNDS

On April 8, 2011, the SEC filed a complaint against Perry A. Gruss ("Gruss"), the former chief financial officer of D.B. Zwirn & Co., L.P. ("DBZCO"), alleging aiding and abetting fraud in connection with the improper transfer of client cash, both between client funds and from client funds to DBZCO and third parties. DBZCO, now defunct, was an investment adviser that, at various times during the period 2002 through 2009, managed five hedge funds including the D.B. Zwirn Special Opportunities Fund, Ltd. (the "Offshore Fund") and D.B. Zwirn Special Opportunities Fund, L.P. (the "Onshore Fund"), along with several managed accounts. The Offshore Fund and the Onshore Fund were separate entities with largely distinct pools of investors.

According to the Commission's complaint, during the period March 2004 through July 2006, Gruss knowingly misused the signatory and approval authority he had over funds held in client accounts and directed and/or authorized more than $870 million in improper transfers of client cash, both between client funds and from client funds to DBZCO and third parties. The complaint alleges that the improper transfers directed and/or approved by Gruss included: (i) $576 million in transfers between March 2004 and July 2006 from the Offshore Fund to the Onshore Fund or directly to third parties to fund Onshore Fund investments; (ii) $273 million in transfers between June 2005 and May 2006 from the Offshore Fund to repay a revolving credit facility of the Onshore Fund; (iii) $22 million in transfers from client accounts between May 2004 and March 2006 to pay management fees to DBZCO before due and payable in order to cover DBZCO's operating cash shortfalls; and (iv) a total of $3.8 million taken from the Onshore Fund and a managed account in September 2005 to fund a portion of the $17.95 million purchase price of a Gulfstream IV aircraft purchased by DBZCO's managing partner. The complaint further alleges that the improper transfers were not permitted by the offering documents or the management agreements, were not disclosed to clients or documented as loans, and no interest was paid to clients for the unauthorized use of their funds at the time. Facing termination, Gruss resigned in October 2006, when at least $108 million of the unauthorized transfers remained outstanding. All of the money improperly transferred was eventually repaid with interest, but only after an internal investigation.

The SEC seeks a permanent injunction, disgorgement of any ill-gotten gains plus prejudgment interest and monetary penalties.

 

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