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Thomas O. Gorman,
Dorsey and Whitney LLP
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    Hedge Fund Adviser Charged with Fraud For Secretly Restructuring to Favor Select Investors

    A hedge fund manager and its principals were charged with fraud for secretly altering the structure of the funds for the benefit of select investors and then raising additional funds without disclosing this to the new investors. The complex eventually collapsed as the market crisis continued in 2008. The SEC’s complaint names as defendants New Stream Capital, LLC, a registered investment adviser; New Stream Capital (Cayman), Ltd., a Cayman Island exempt company; David Bryson, the owner, manager and founder of New Stream; Bart Gutekunst, a managing partner and founder of New Stream; Richard Pereira the registered adviser’s CFO; and Tara Bryson, director of marketing and investor relations. SEC v. New Stream Capital, LLC, Case No. 3:13-cv-00264 (D. Conn. Filed Feb. 26, 2013).

    The New Stream hedge fund complex raised capital from investors and made loans backed by real estate, life insurance policies, oil and gas interests and commercial assets. Its primary investment vehicle was a Master Fund which began receiving investments in 2003. In 2005 the Bermuda Feeder was created to raise money from investors not subject to the U.S. tax laws. That fund typically loaned money to the Master Fund. New Stream paid a high interest rate on the loans which were secured by the assets of the Master Fund. That fund profited on the spread between what was paid to the Bermuda Feeder and to the commercial borrowers from the Master Fund.

    The Bermuda Feeder investments grew faster than those of the Master Fund. Accordingly, Mr. Bryson decided to restructure the group so that all investors in the Master Fund would have the same investment profile. Two new feeder funds were created which would invest directly in the Master Fund. One was for U.S. taxpayers, The other, a Caymen Feeder, was for investors not subject to the U.S. tax laws. The plan called for investors in the Master Fund to transfer their shares. The Bermuda feeder would eventually be phased out. As part of the plan the rate for fees charged by the adviser was increased.

    There were extensive communications with investors to achieve the restructuring. The largest single investor in the Bermuda fund was registered investment adviser Gottex Fund Management Ltd. Gottex advised several funds which had about $300 million invested in the Bermuda fund representing 67% of its assets. Gottex objected to the restructuring since it altered the liquidation rights, eliminating the preference of the adviser. The adviser threatened to withdraw investments. To prevent this, Messrs. Bryson and Guterkunst implemented a scheme to secretly revise the hedge fund’s capital structure, giving Gottex and other select offshore investors priority in the event of liquidation.

    Subsequently, New Stream’s marketing department, lead by Ms. Bryson, raised nearly $50 million from new investors. Those investors were provided with solicitation materials which predated the deal with Gottex and thus did not mention the revised capital structure. New Stream’s operative financial statements were altered by Mr. Pereira to conceal the revisions to the altered operating structure. The new investors were not informed about the Gottex deal.

    As the financial crisis continued New Stream faced $545 million in redemption requests. Further redemptions were halted. It ceased raising new investor money. Eventually New Stream and its affiliates filed for Chapter 11 bankruptcy. The Commission’s complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2) and Section 206(4).

    Ms. Bryson, who is charged in counts based on Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Section 206(4), settled with the Commission, consenting to the entry of a permanent injunction based on those Sections. She also agreed to be barred from the securities industry. The other defendants are litigating the case.

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