The SEC brought an action against a hedge fund manager for radically altering the investment policies of the fund without telling shareholders. The change was made to benefit a floundering public company of which he was chairman and in which a firm affiliated with his father had invested. By the time investors learned of the change in policy, the fund and their money was concentrated in the illiquid shares of a financially troubled company. SEC v. Rooney, Case No. 11-cv-8264 (N.D. Ill. Filed Nov. 18, 2011).

Patrick Rooney and Solaris Management, LLC are named as defendants in the case. Mr. Rooney is the founder and managing partner of Solaris Management. The firm serves as the general partner and investment adviser of hedge funds Solaris Opportunity Fund, LP (“the Fund”) and the Solaris Offshore Fund. The two entities were managed together.

The Fund claims to follow a non-directional strategy to trade equity, options and futures. According to the Fund, under this strategy it used long, short and neutral positions to hedge risk, generate income and maintain equity growth over the long term. Between August 2003 and September 2008 investors put nearly $30 million into the Fund. The Fund had 30 investors and reported assets of $16,277,780 as of December 2008.

Initially Mr. Rooney caused the Fund to trade in accord with its defined strategy. Beginning in 2005 however, the defendants caused the Fund to begin investing in Positron Corporation, a molecular imaging company whose shares were traded on the NASDAQ OTC Bulletin Board. At the time the company had reported significant losses. Its auditors had expressed substantial doubt as to its ability to continue as a going concern. Mr. Rooney joined the board of directors, became Chairman and started drawing a salary in 2004 in connection with financing furnished to Positron from another entity whose board included his father. By 2007 the Fund had invested millions of dollars in Positron and held about 60% of the outstanding shares.

Fund investors were not told about the investment in Positron until March 2009. At that point a news letter told investors that Mr. Rooney became Chairman of the company to safeguard the investment of the Fund. This statement was false, according to the complaint. In fact the investment in Positron benefited that company and Mr. Rooney. In contrast, Fund investors were left with a concentrated, undiversified and illiquid position in a cash poor company with a history of losses.

The Commission’s complaint alleges violations of Securities Act Section 17(a), Exchange Act Sections 10(b) and 13(d)(1) and Advisers Act Sections 206(1), (2) and (4). The case is in litigation.

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