ADVISER TO FEEDER FUNDS NAMED IN FRAUD ACTION
The SEC filed a fraud action against an investment adviser to funds that suffered significant losses from investing with Ponzi scheme king Bernard Madoff and fraudster Tom Petters. In the Matter of Neal R. Greenberg, Adm. Proc. File No. 3-14033 (Sept. 7, 2010). Respondent Neal Greenberg is a registered investment adviser. He is also the controlling shareholder of Tactical Allocation Services (“TAS”) and the head portfolio manager of its subsidiary Agile Group, LLC. Agile served as investment adviser to affiliated hedge funds The Safety Fund, the Performance Fund, the Master Fund, the International Fund and the Variable Fund. The Order centers on claims that Mr. Greenberg made material misrepresentations to induce investors to purchase shares in the funds and that he breached his fiduciary duty, putting many investors in funds for which they were not suited.
Many of TAS’ clients invested in the various Agile funds. In fact, by the end of 2006 about 83% of the assets under management by TAS were invested in Agile hedge funds. Many of those investors were conservative and at or near retirement age.
Between 2006 and 2008 Mr. Greenberg is alleged to have made material misrepresentations and omissions to investors to induce them to place their money in the Agile funds. Those included:
• The funds were “immensely” diversified. In fact, in September 2008 48% of the holdings of the Safety, International and Variable Funds were invested indirectly with Tom Petters. Another 14% were invested indirectly with Bernard Madoff.
• Investors were not told that the Safety, International and Variable Funds typically placed a large proportion of investor capital in a few hedge funds.
• Representations that investments in the Safety, International and Variable Funds involved minimal risk with conservative growth and that they were suitable for retirees. In fact, the 2007 PPM for the funds stated that they had a high degree of risk, sought capital appreciation and were suitable only for investors who did not require liquidity.
Overall, the three funds had concentrated positions and significant liquidity problems which made them unsuitable investments for retirees according to the Order for Proceedings. Mr. Greenberg also made misleading disclosures regarding the fees charged and improperly paid personal expenses with fund assets. The funds also had inadequate internal procedures.
By mid-September 2008, the Safety, Variable and International Funds limited redemptions due to a lack of liquidity. Later that month, redemptions were suspended because of substantial losses. The losses resulted from investing in the fraudulent scheme of Tom Petters. By December 2008 investors learned that the three funds had more losses. This time the losses came from the fraudulent scheme of Bernard Madoff.
The Order for Proceedings alleges willful violations by Mr. Greenberg of Exchange Act Section 10(b) and Advisers Section 206(1), 206(2) and 206(4). Agile is alleged to have willfully aided and abetted and caused by Mr. Greenberg willfully violated Advisers Act Section 206(4). The case is in litigation.