by T. GormanPosted on Posted in SECActions

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.

Tagged with: , , ,

by T. GormanPosted on Posted in SECActions

Undisclosed conflicts by investment advisers and others is a focus of the current SEC enforcement program. In its most recent action, the conflicts came from a firm with an indirect, undisclosed controlling interest in the adviser. Unlike most of these actions, however, it did not settle at filing and was brought in federal district court as a civil injunctive action rather than as an administrative proceeding. SEC v. Atlantic Asset Management, LLC (S.D.N.Y. Filed December 15, 2015).

Atlantic Asset, previously known as Hughes Capital Management, LLC, has been a registered investment adviser since 1993. Hughes changed its name to Atlantic in 2015 after it was merged with another adviser. The firm is a wholly-owned subsidiary of GMT Duncan LLC.

BFG Socially Responsible Investments Ltd., holds a significant interest in GMT, acquired in 2014. The firm had the right under certain agreements to select one member of GMT’s board of directors and the CIO for that firm and Hughes.

The 2014 Form ADV for Hughes did not disclose the interest of BFG in the firm. Yet that form requires advisers to identify each controlling person. It also requires the disclosure of direct and indirect owners. When Hughes filed an amended Form ADV disclosing its acquisition by GMT the adviser stated that the parent had two partners. BFG was not mentioned.

BFG appointed the Hughes CIO. In August 2014 the CIO proposed the acquisition of certain Tribal bonds. An indenture for the bonds stated that the proceeds were to be used primarily to acquire an annuity which would be provided and managed by BFG’s parent, the Annuity Provider, for a fee. The placement agent for the bonds would also be paid a fee. Although there were significant questions regarding the Tribal bonds, the CIO invested over $27 million on behalf of nine of the adviser’s clients.

Subsequently, several Hughes clients expressed concerns regarding the purchase of the Tribal bonds. Specifically, there were questions regarding their valuation and suitability. A demand was made to unwind the deal. While Hughes assured the investors the Placement Agent had others interested in acquiring the bonds, no purchasers emerged.

In April 2015 a second purchase of Tribal bonds was made. In total the adviser had invested over $40 million in the bonds. While investors again raised questions regarding the transactions the investments were not unwound. Investors were not told about the conflicts or the interest of BFG.

In May 2015 when the adviser filed a Form ADV with the Commission it did not mention the interest of BFG. The complaint alleges violations of Advisers Act Sections 206(1), 206(2), 206(4) and 207. The complaint is pending.