The SEC charged a University of Georgia undergraduate with running a Ponzi scheme out of his fraternity house. The SEC asserts that he utilized group texts to solicit others associated with the university to invest in a hedge fund which did not exist. He also used on-line cash applications as a means for one investor to send money to other investors to further his scheme. The respondent touted high historical returns and false credentials. The SEC contends that the respondent used the funds for personal expenses including gambling junkets and adult entertainment.
Affinity-based Ponzi schemers will use their positions of trust to swindle funds from the naïve and unsuspecting. In this case, the tools may be new (group texts, cash apps, fraternity), but the con job is as old as the securities markets. Tell your friends and family not to give money to anybody without checking the SEC website and making sure the “manager” is registered.
The SEC has commenced civil enforcement proceedings against a hedge fund sponsor and its principals for failing to notify investors of its liquidity crisis and using improper transactions to pay redeeming investors. The Department of Justice has brought parallel criminal charges. According to the SEC, the respondents reported positive returns that averaged 17% per annum from 2003-2015. Additionally, the respondents assured investors that they would pay all redemptions within 90 days. The SEC alleges the firm inflated valuation of investments including 2 oil production companies, looted certain portfolio companies to pay redemptions, unlawfully transferred assets, and lied to auditors. As redemptions accelerated and the liquidity crisis grew, the SEC asserts that the respondents misled current and prospective investors about the funds’ valuation, liquidity and prospects. Ultimately, the funds ceased redemptions by placing most assets in an illiquid side pocket.
OUR TAKE: Compliance officers and due diligence professionals should review this complaint as a primer on private fund management misconduct. Red flags included consistent high performance, subjective valuations, conflicted transactions, and misrepresentations to auditors.