[ by Howard Haykin ]

The SEC on Tuesday charged a pair of hedge fund managers and their CT-based advisory firm with lying to investors about their fund’s structure and financial condition before it failed during the financial crisis. 

Profile of Respondents.   The SEC on Tuesday charged a pair of hedge fund managers and their CT-based advisory firm with lying to investors about their fund’s structure and financial condition before it failed during the financial crisis.  Also named in the complaint against New Stream were the firm’s ex-CFO and head of Investor Relations. 

Profile of Defendants.   New Stream, based in Ridgefield, CT, was an-SEC registered investment adviser for less than a year – from 1/27/06 to 1/8/07.  During the relevant period, New Stream was general partner and investment manager of New Stream Secured Capital, L.P. (“Master Fund”). It also served as investment manager for New Stream Capital Fund Limited (“Bermuda Feeder”) and as the managing member of New Stream Secured Capital (U.S.), LLC (“U.S. Feeder”).

New Stream was controlled, managed and indirectly owned by David Bryson and Bart Gutekunst – together they owned 67% of the adviser.   

Bart Gutekunst, 61, is an owner, managing partner, and a founder of New Stream . He reportedly  lives in Weston, CT.  Previously, Gutekunst was an SVP at a private equity fund, and had been Chairman of 3 companies and Vice Chairman and CFO of a 4^th.  He has also served on 12 boards.

David Bryson, 44, is an owner, managing partner, and a founder of New Stream. He too reportedly lives in Weston, CT.  Bryson once held Series 3, 7, 63, and 65 licenses. Previously, Bryson was a director of the asset management division of a major financial firm, and was president of the alternative investment division of a registered B/D.

Richard Pereira, 40, was New Stream’s CFO during the relevant period and is licensed as a CPA in New York. He too reportedly lives in Ridgefield, CT.  Pereira started his career as an auditor for a “Big Four” accounting firm, and currently is Managing Partner of his own capital advisory firm. 

Tara Bryson, 38, served as director of marketing and investor relations at New Stream during the relevant period. She is the sister of David Bryson and, reportedly lives in West Suffield, CT. Before joining New Stream, she served in the U.S. military as a member of the Army Bomb Squad.  She currently works as a goat farmer.

SEC Findings and Allegations.    New Stream managed a $750 million hedge fund focused on illiquid investments in asset-based lending. In March 2008, more than one year after New Stream dropped its SEC registration, Bryson and Gutekunst revised the fund’s capital structure after Gottex, a fund manager with nearly $300 million invested in New Stream, had threatened to redeem its investment.  A restructuring of the New Stream hedge fund a few months earlier had created 2 new feeder funds and eliminated the preferential liquidation rights previously enjoyed by the feeder fund through which Gottex had invested. Bryson told others at New Stream that if Gottex withdrew, the firm’s hedge fund business would “tank.”

The co-owners did not inform all investors that New Stream had restructured to favor Gottex;  nor did they make a public disclosure.  Such information would have made it much harder for the firm to attract and retain investors, as well as jeopardizing cash flow from a lucrative fee arrangement that the fund’s managers put in place in late 2007.

Gottex Fund Management. Bryson and Gutekunst then directed New Stream’s marketing department to continue marketing the hedge fund as though all investors were on the same footing when, in fact, Gottex had priority over other fund investors in the event of the fund’s liquidation.   The fund used misleading marketing documents that omitted the change, and CFO Pereira falsified the fund’s financial statements to conceal the restructuring.  Investors who asked about redemption levels were not told about the Gottex redemption request and others that followed.  

As the financial crisis worsened in September 2008, New Stream was facing $545 million in redemption requests and was forced to suspend further redemptions and cease raising new funds.  After several failed attempts at restructuring, New Stream and its affiliated entities filed for bankruptcy in March 2011.  Based on current estimates, the defrauded investors, whose bankruptcy claims totaled approximately $182 million, are expected to receive approximately 5 cents on the dollar - substantially less than half the amount that Gottex and other investors in its preferred class are expected to receive.

SEC Charges.   Bryson, Gutekunst, and Pereira were charged with violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

Bryson and Gutekunst are charged with violating Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder.

Pereira is charged with aiding and abetting their violations of Section 206(4).

The SEC is seeking a variety of sanctions and relief against them including injunctions, disgorgement of ill-gotten gains with prejudgment interest, and penalties.

In the settlement with Tara Bryson, which is subject to court approval, she agreed to be permanently enjoined from further violations of the provisions of the securities laws at issue in this case. She also agreed to be permanently barred from the securities industry.

Criminal Charges.   In a parallel action, the U.S. Attorney for the District of Connecticut today announced criminal charges against Bryson, Gutekunst, and Pereira.

SEC Staff Credits.   Investigation, which is continuing, by Sheldon Pollock, Lisa Knoop, Alan Maza, Kevin McGrath, Alistaire Bambach, Scott York, George Stepaniuk of the NY Regional Office.

For further  details, go to:   [ SEC PR 13-28, 2/26/13 ]        [ SEC Complaint Filed in U.S. District Court  ].

For further  details, go to:   [ SEC PR 13-28, 2/26/13 ]        [ SEC Complaint Filed in U.S. District Court  ].