IA Settles With SEC, USAO After Letter to Investors Admitting Losses

The SEC and the Manhattan U.S. Attorney’s Office brought actions against a hedge fund adviser who lost most of the money raised from investors through risky trading while trying to conceal that fact from them, the brokers and others – at least until the end. In the Matter of Owen Li, Adm. Proc. File No. 3-17005 (Filed December 16, 2015).

Mr. Li once worked as a trading assistant at Galleon Management, LP. Respondent Canarisic Capital, LLC is an exempt reporting adviser 70% owned by Mr. Li. The remaining 30% was owned by his business partners. Canarsi was the adviser for Canarsi Capital Fund Master, LP, Canarsi Capital Fund, LP, an onshore fund, and Canarsi Capital Fund Offshore, Ltd.

The onshore fund launched in 2013 with ten investors and $16.55 million. It ended the year with a return of 69% and about $47.7 million in AUM. Mr. Li induced investors to entrust their money to the fund with a series of misrepresentations. Those included a claim that it would be operated in a conservative manner and that the portfolio would be balanced and risk managed through position limits. In fact by early 2014 investments in the firm exceeded the concentration limits.

Mr. Li then undertook a series of steps which were designed to conceal the nature of the trades being undertaken and the risk. Those included:

Deleting trades: in a number of instances from early 2013 through the beginning of 2015 Mr. Li deleted select trades from the firm’s systems to conceal them from others;

Concealed trades: During the same period Mr. Li purchased large amounts of market index call options which were reported to the prime broker but concealed from others at the advisory by not recording them in the systems.

Fictitious trades: In March and April 2014 Mr. Li began reporting fictitious sell trades to the adviser’s prime broker to conceal risk and minimize margin.

Misreporting trades: Trades were misreported to a second prime broker to forestall margin calls and conceal the leverage in the account.

Misrepresenting positions: When the second prime broker observed large losses and raised questions Mr. Li falsely claimed that the positions were hedged through the adviser’s other prime broker.

Subsequently, the second prime broker used by the adviser insisted that Canarsie hire a consultant to review firm procedures. While the consultant was retained, all of its recommendations were not adopted.

In 2014 as losses continued Mr. Li intentionally delayed, at times, the release of the results. When this occurred he misrepresented the reason for the delay. Finally, in January 2015 Mr. Li sent a letter to all investors noting that he had directed “a series of transactions over the last several weeks that resulted in the loss of all but two hundred thousand dollars of the Fund’s capital.” The Order alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4).

Respondents resolved the charges, consenting to the entry of a cease and desist order based on the Sections cited in the Order. The firm also consented to the entry of a censure while Mr. Li was barred from the securities business. Respondents will, on a joint and several basis, pay disgorgement of $3,379,134 and prejudgment interest. Payment will be satisfied by a restitution order entered in U.S. v. Li, an action in which Mr. Lei pleaded guilty. The settlement was entered by consent with an admission to the jurisdiction of the SEC but does not specify that it is on the basis of neither admitting nor denying or that it is based on admissions.

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