Two hedge fund managers and their firms were separately charged by the SEC with lying to investors about how they were handling the money invested in their respective hedge funds.  In one instance, San Francisco-based hedge fund manager Hausmann-Alain Banet and his firm Lion Capital Management took advantage of the trust of a retired school teacher.  In the other, Chicago-based hedge fund managers Norman Goldstein and Laurie Gatherum and their firm GEI Financial Services fraudulently dipped into excessive fees and capital withdrawals from a hedge fund they managed, according to the SEC respective complaints.

 

SEC Findings and Allegations.

The San Francisco case. Banet and Lion Capital Management led the teacher to believe that his hedge fund would invest in the stock market using a long/short equity investing strategy, according to the SEC complaint.  Unbeknownst to her, the hedge fund manager used the teacher’s investment totaling $550,000 to pay unauthorized personal and business expenses, including his home mortgage, office rent, and staff salaries.

 

In addition, Banet provided phony account statements showing non-existent investment gains and listing an independent administrator that performed no actual work for the fund.  In a parallel action, Banet faces criminal charges by the U.S. Attorney’s Office for the Northern District of California, announced earlier this week.

 

The Chicago case. Goldstein, Gatherum and GEI Financial Services also banked on his clients' trust.  When calculating fees, advisors removed various performance hurdles.  In addition, Goldstein, Gatherum, and their firm never told their advisory clients that Illinois regulators had stripped Goldstein of his securities registrations in 2011, barring him from providing investment advisory services in the state.

 

However, even after losing his registration status, Goldstein continued to make all investment decisions on behalf of clients; putting himself and Gatherum in violation of compliance rules applicable to SEC-registered investment advisers.  All told, they siphoned at least $147,000 in excessive fees and capital withdrawals from a hedge fund they managed.

 

"The most serious hedge fund frauds involve advisers who play fast and loose with investor money.  Investors can complement the SEC’s vigilant enforcement against hedge fund misconduct by becoming increasingly wary of hedge fund managers who boast extreme performance measures and asking well-informed questions about investment strategy, fees, and potential conflicts of interest." -- Bruce Karpati, Chief of the SEC Enforcement Division’s Asset Management Unit.

 

For further details, go to [SEC, 10/3/12], [SEC Complaint - GEI Financial Services], and [SEC Complaint - Lion Capital Management].