Institutional Investment Fraud Roundup: Ex-Hedge Fund Managers’ Guilty Plea Over Bilking Investors of Almost $1M Get 3-Year Prison Term, SEC Sues Investment Adviser Over Alleged $37M Ponzi, and SEC Files Lawsuit Over Purported “Fund of Funds” Scam

Ex-hedge fund managers Christopher Fardella and Michael Katz have been sentenced to three years in prison after they pleaded securities fraud and conspiracy charges for defrauding investors of nearly $1 million. Per court documents, between April 2005 and November 2006, the two men, along with two co-conspirators, were partners in KMFG International LLC, which is a hedge fund.

They cold called investors throughout the US and provided them with misleading information about the fund, its principals, and financial performance even though KMFG actually lacked a track record and never generated any profit for investors. The defendants and co-conspirators lost and spent $981,000 of the $1,031,086 that was given to them by investors.

Meantime, another hedge fund manager, Oregon-based investment advisor Yusaf Jawad, is being sued by the Securities and Exchange Commission over an alleged $37 million Ponzi scam. The securities lawsuit against him and attorney Robert Custis was filed in the U.S. District Court for the District of Oregon.

According to the Commission, Jawad employed bogus marketing materials claiming double-digit returns to get investors to take part in a number of hedge funds that he managed. He then allegedly redirected the funds into accounts under his control and used some of the money to pay for his own expenses. He also is accused of setting up bogus assets, providing investors with false accounts statements, and making up a fake buyout of the funds so investors would believe that their interests would be redeemable. Older investors were paid off using newer investors’ money. As for Custis, he allegedly sent investors misleading and false statements about the purported purchase of hedge funds assets, while consistently misrepresenting that a buy was “imminent” and would lead to them making a profit.

Over another Ponzi scam, the SEC is suing Georgia private fund manager Angelo Alleca and his Summit Wealth Management Inc. for bilking about 200 investors of approximately $17 million. Claiming to employ a supposed fund-of-funds strategy, Alleca, the Commission contends, was using clients’ money to play the stock market and losing badly.

Per the regulator’s complaint, the defendants sold and offered interests in Summit Fund, which they told clients was a fund-of-funds. (The strategy for this fund is supposed to involve investing in other investment products to diversify the money while keeping exposure risks low.) However, not only did Alleca sustain financial losses when he allegedly opted to instead use investors money to engage in securities trading, but also he then hid the losses, made the fraud worse, and sustained even more losses. The SEC wants an emergency asset freeze so that more investment losses don’t happen.

Two Hedge Fund Managers Sentenced To Three-Year Prison Terms For Defrauding Investors Of Nearly $1 Million, Justice.gov, September 19, 2012

SEC Names Hedge Fund Manager, Lawyer in Alleged $37M Ponzi Scheme, Bloomberg/BNA, September 21, 2012

SEC v. Alleca
(PDF)

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Lehman Brothers Australia Found Liable in CDO Losses of 72 Councils, Charities, and Churches, Institutional Investor Securities Blog, September 25, 2012

Merrill Lynch Told to Pay $3.6M to Brazilian Heiress for Brother’s Alleged $389M in Unauthorized Trading, Stockbroker Fraud Blog, September 22, 2012

Municipal Advisor Bill Passes Vote by US House of Representatives, Institutional Investor Securities Blog, September 21, 2012