[ by Howard Haykin ]

In Houston, far afield from NASA Space Center, SEC Enforcement exposed hedge funds investors being fleeced. with the help of the CEO of a New York broker-dealer.  An unregistered adviser allegedly was hitting investors with bloated fees, then steering those fees to a broker-dealer in New York.  A pair of 38-year olds are accused of masterminding the scheme.

Respondents in the Case.   John Thomas Capital Management Group LLC d/b/a  Patriot28 LLC ("JTCM") is an unregistered investment adviser that serves as general partner of 2 hedge funds - John Thomas Bridge and Opportunity Fund LP I, and John Thomas Bridge and Opportunity Fund LP II. Both are based in Houston, TX.

George Jarkesy Jr., 38, is the manager of JTCM.  In that capacity, he purportedly controls all operations and activities of JTCM and the Funds. Jarkesy is a frequent media commentator, a radio talk show host, and the founder of the National Eagles and Angels Association, an organization designed to introduce investors to start-up companies in need of financing.

Thomas Belesis, 38, of NYC, is founder and CEO of John Thomas Financial, Inc. ("JTF"), based in New York and, until late 2011, was the primary placement agent for the 2 hedge funds. The B/D also was one of several broker-dealers that executed equity trade orders for the Funds. Belesis and Jarkesy became acquainted in 2003.

John Thomas Financial, Inc. ("JTF"), is a broker-dealer registered with the SEC and a FINRA member, with a sales force of about 125 RRs. JTF is wholly-owned by ATB Holding Company LLC, which is controlled by Belesis. JTF offers brokerage and investment services, investment banking services and private wealth management.

SEC Findings and Allegations.   George Jarkesy worked closely with Thomas Belesis to launch 2 hedge funds that raised $30 million from investors.  Jarkesy and JTCM launched Fund I in 2007 and Fund II in 2009. Since September 2011, the Funds have been known as Patriot Bridge and Opportunity Fund LP I and LP II and the adviser has been known as Patriot28 LLC.1

Jarkesy and his firm John Thomas Capital Management allegedly inflated valuations of the funds’ assets, causing the value of investors’ shares to be overstated and his management and incentive fees to be increased.  Jarkesy, a frequent media commentator and radio talk show host, also lied to investors about the identity of the funds’ auditor and prime broker.

Meanwhile, although they shared the same “John Thomas” brand name, Jarkesy’s firm and Belesis’ firm, John Thomas Financial, were portrayed as wholly independent.  Jarkesy led investors to believe that as manager of the funds, he was solely responsible for all investment decisions.  However, Belesis sometimes supplanted Jarkesy as the decision maker and directed some investments from the hedge funds into a company in which his firm was heavily invested.  Belesis also bullied Jarkesy into showering excessive fees on John Thomas Financial even in instances where the firm had done virtually nothing to earn them.

The Funds invest in 3 asset classes: (i) bridge loans to start-up companies;  (ii) equity investments principally in microcap companies; and,  (iii) life settlement policies. The Funds’ assets under management ("AUM") peaked at approximately $30 million at the end of 2011.

Among other things, Jarkesy and JTCM allegedly:

• recorded arbitrary valuations without any reasonable basis for certain of the Funds’ largest holdings, thus causing the Funds’ performance figures to be false and misleading and their own compensation to be falsely inflated;
• marketed the Funds on the basis of false representations about, among other things, the identities of their auditor and prime broker - erroneously referring to KPMG and Deutsche Bank, respectively;  and,
• breached their fiduciary duty of full and fair disclosure to the Funds by failing to disclose their repeated favoring of the pecuniary interests of Belesis, the CEO of JTF, and JTF, which served as the Funds’ placement agent.

Jarkesy is further charged with allegedly using fund assets to hire multiple stock promoters in 2010 and 2011 to create an artificial and unsustainable spike in the price of two microcap stocks in which the funds were heavily invested.  Those efforts enabled the funds to record temporary gains in the value of the microcap stocks that Jarkesy used to mask the write-down of other more illiquid holdings of the funds.

  Jarkesy further allegedly violated his fiduciary duties to the funds in multiple instances by providing excessive compensation to Belesis and John Thomas Financial. This only incited further demands by Belesis - e.g., in February 2009, Belesis angrily complained via e-mail that Jarkesy was not steering enough money to John Thomas Financial, and Jarkesy responded that “we will always try to get you as much as possible, Everytime [sic] without exception!” On another occasion, Jarkesy reassured Belesis that “[n]obody gets access to Tommy until they make us money!!!!!”

Violations Charged by SEC.   Jarkesy and John Thomas Capital Management are charged with violating and aiding and abetting violations of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5, and violated Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act and Rule 206(4)-8.

The SEC’s order further charges that Belesis and John Thomas Financial aided and abetted and caused Jarkesy’s and John Thomas Capital Management’s violations of Sections 206(1), 206(2) and 206(4) of the Advisers Act and Rule 206(4)-8.

The administrative proceedings will determine what, if any, remedial action is appropriate in the public interest against Jarkesy, John Thomas Capital Management, Belesis, and John Thomas Financial including disgorgement and financial penalties.

SEC Staff Credits.   Investigation by Igor Rozenblit, Kathy Murdocco, and Michael Osnato in the NYRO.  SEC litigation will be led by Todd Brody. 

For further details, go to:   [SEC PR 13-46, 3/22/13] and [SEC Order Admin. Proceeding File No. 3-15255, 3/22/13].