SEC charges hedge fund manager, trustees with running multi-million dollar offering fraud

Date: Wednesday, December 22, 2010
Author: James Langton, Investment Executive

Scheme raised in US$34 million from investors in U.S., Canada

The U.S. Securities and Exchange Commission has filed a civil injunctive action against the operators of two defunct hedge funds, which it claims conducted an offering fraud that raised US$34 million from 101 investors throughout the United States and Canada

The SEC brought the action against the four managing members of the Arcanum Equity Fund, LLC and the Vestium Equity Fund. It also charged Imperium Investment Advisors, LLC, a registered investment adviser which served as trustee for Vestium Equity Fund, and its three principals for their roles in the alleged scheme.

In its complaint filed Tuesday, the SEC alleges that from April 2008 to April 2010, the accused raised funds promising investors that they would generate substantial returns through conservative investments in high-grade debt and, in some cases, limited commodities transactions. Instead, the SEC says that they used investor funds for illiquid private investments and loans to affiliate entities. It says that the funds lost at least US$8.1 million, paid at least US$6 million to investors in alleged profits, and that the funds’ managers paid themselves over US$1.3 million in compensation “that was improperly based on inflated asset values and fictitious profits”.

The regulator is seeking permanent injunctive relief, disgorgement, prejudgment interest, and civil penalties.

The allegations have not been proven, although the SEC has settled with one of the defendants, who consented to a final judgment providing for permanent injunctive relief, disgorgement of US$1.2 million, and a civil penalty of US$130,000. And it partially settled with another defendant, who also consented to a judgment providing for injunctive relief, and for the imposition of disgorgement and a civil penalty, whose amounts will be determined at a later date. The matter remains in litigation with respect to the remaining defendants.

The SEC acknowledged the assistance of the Alberta Securities Commission in the case.