Securities Law Prof Blog

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

Thursday, December 1, 2011

SEC Charges Hedge Fund Managers in Inquiry Targeting Suspicious Investment Returns

As part of an initiative to combat hedge fund fraud by identifying abnormal investment performance, the SEC today announced enforcement actions against three separate advisory firms and six individuals for various misconduct including improper use of fund assets, fraudulent valuations, and misrepresenting fund returns.  Under the initiative — the Aberrational Performance Inquiry — the SEC Enforcement Division’s Asset Management Unit uses proprietary risk analytics to evaluate hedge fund returns. Performance that appears inconsistent with a fund’s investment strategy or other benchmarks forms a basis for further scrutiny.

In particular, the SEC alleges that the firms and managers engaged in a wide variety of illegal practices in the management of hedge funds or private pooled investment vehicles, including fraudulent valuation of portfolio holdings, misuse of fund assets, and misrepresentations to investors about critical attributes such as performance, assets, liquidity, investment strategy, valuation procedures, and conflicts of interest.

The SEC has filed several enforcement actions to date stemming from this initiative. Of the four actions announced today, three were filed in federal court and one was brought as an administrative proceeding.  They are:

Michael Balboa and Gilles De Charsonville

ThinkStrategy Capital Management and Chetan Kapur

Patrick Rooney and Solaris Management

LeadDog Capital Markets, Chris Messalas and Joseph LaRocco

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