SEC Halts Scheme By IM Who Bilked Off-Shore Investment Manager
It can happen to anybody. The SEC has brought what seems like an almost endless string of investment fund and offering fraud actions. Typically small, unsophisticated investors, often known to the fraudster, are targeted with sales pitches of extravagant returns. The Commission arrives as the scheme as it is collapsing, halts it and does its best to return some part of the investments.
The Commission’s most recent action in this line of cases differs only because of the type of investor. This time the investor was a Cayman Island – based asset manager and private merchant banking group. The Investment Manager managed a segregated portfolio of another firm registered in the Cayman Islands. The Investment Manager had been appointed as a sub-adviser to the Fund. Sophisticated or not, one can be defrauded. SEC v. Matrix Capital Markets, LLC, Civil Action No. 1:16-cv-069395 (S.D.N.Y. Filed August 11, 2016).
Defendants named in the action are Matrix Capital, a California state registered investment adviser based in San Francisco and Nicholas M. Mitsakos. The firm purports to have been managing one fund and separate accounts since January 2012. Mr. Mitsakos is the founder, CEO and CIO of Matrix Capital.
Matrix was formed in October 2013. The next year the Defendants began marketing efforts, claiming that Mr. Mitsakos and the firm were experienced investment managers. Solicitations were based in part on the firm’s claimed track record which was little more than a series of misrepresentations including:
Prior results: Defendants created a hypothetical portfolio. Trading for the portfolio was not based on actual trades. The claimed results from the portfolio, detailed on a monthly and yearly basis back to 2012 were touted to potential investors.
Newsletter: The Matrix Newsletter touted Mr. Mitsakos as the investment manager responsible for all of the results.
Updated results: Periodically Mr. Mitsakos altered the trading of the hypothetical portfolio creating new results which were circulated to potential investors; those results supposedly ranged from 20.9% to 66.3% for the period 2012 through 2015, according to one news letter.
Investments: The trading results were supposedly achieved with personal funds and those of family and friends.
Hypothetical results: Investors were not told that the results were from a model and not actual trading.
Potential investors were told that the firm had as much as $60 million in AUM. Portions of the funds were represented to be personal while other funds came from family and friends. In fact the firm never had more than $2 million in AUM.
The Defendants also told potential investors that Matrix Capital had established relations with Brokerage Firms A and B as its prime brokers. A Big Four auditing firm supposedly conducted the firm’s audits. The representations were false, according to the complaint.
In early 2015 Mr. Mitsakos was introduced to the principals of Investment Manager. Subsequently, Investment Manager and Matrix Capital entered into a series of arrangements under which Matrix Capital would manage $2 million for the Investment Manager and use the funds for securities trading under a “first-loss capital program.” Under the terms of that agreement a New York investment adviser agreed to give Matrix Capital 10:1 leverage which allowed Matrix Capital to deposit with the New York adviser $1.2 million and trade up to $12 million. Matrix Capital was to receive a “manager payout” of 84% of all profits and was responsible for all losses. Matrix Capital traded in the program for several months.
Mr. Mitsakos did not invest about 40% of the investment funds. Rather, those funds were misappropriated. Investment Manager did not learn this fact until November 2015 at which point a demand for the money was made. Part of the funds were returned.
The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). The case is pending. The U.S. Attorney’s Office for the Southern District of New York filed parallel criminal charges against Mr. Mitsakos.