Securities Law Prof Blog

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

Wednesday, February 25, 2009

SEC Charges Suspended Broker with Running Fraudulent Hedge Funds

The SEC charged Westgate Capital Management, LLC, a Pearl River, N.Y., investment management firm, and its managing member, James M. Nicholson, with operating a large-scale scheme that defrauded hundreds of investors of millions of dollars by providing them with misleading marketing materials that significantly overstated investment returns and by misrepresenting the value of the assets under management.  The SEC alleges that they solicited investors with false claims of an almost unbroken eight-year string of monthly investment successes. Neither the firm nor its principal is registered with the SEC.  The SEC is seeking a court order to freeze assets, and the U.S. Attorney's Office for the Southern District of New York announced parallel criminal charges against Nicholson.

The SEC alleges Nicholson sought to further his fraud by creating a fictitious accounting firm and providing some of his investors with bogus audited financial statements. Nicholson apparently concocted this imposter firm under the name of an actual accountant while using his own telephone number and driver's license to set up a "virtual office."

According to the SEC's complaint, by late 2008, the funds had sustained such losses that Nicholson and Westgate could no longer honor redemption requests. They hid the losses from investors with misrepresentations and false sales brochures. Nicholson further attempted to hide losses in the Westgate fund family by other devices. He closed one fund that was heavily invested in the bankrupt Lehman Brothers and folded its assets into another Westgate fund. He issued bad checks to some investors seeking to cash out, and ultimately suspended all investor redemptions due to what he called investors' "irrational behavior."

Nicholson was barred from the brokerage industry in 2001 for failing to reply or supplying false information in response to inquiries from the National Association of Securities Dealers (now known as the Financial Industry Regulatory Authority).

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