*The Securities and Exchange Commission has charged two San
Francisco-based investment adviser firms along with their former chief
executive, former general counsel, and former portfolio manager with
defrauding investors in a USD100m hedge fund that invested in
sub-prime automobile loans.*
The SEC found that chief executive Benjamin P. Chui and portfolio
manager Triffany Mok – who managed the American Pegasus Auto Loan
Fund – together with general counsel Charles E. Hall, Jr., engaged
in improper self-dealing, misused client assets, and failed to
disclose conflicts of interest.
The firms – American Pegasus LDG and American Pegasus Investment
Management –and Chui, Hall, and Mok settled the SEC's charges by
agreeing to sanctions including bars from the industry and more than
USD1m in penalties and repayments to the fund.
"Fund advisers have a duty to disclose conflicts of interest and act
in the best interests of clients whose assets they are entrusted to
manage," says Marc Fagel, director of the SEC's San Francisco
regional office. "Instead, Chui, Hall, and Mok created a tangled
financial web, using investor funds for their personal benefit and
then attempting to paper over the misconduct by inflating the value of
fund assets."
The SEC's order instituting administrative proceedings finds that
unbeknownst to investors, in mid-2007, Chui used more than USD18m in
loans and advances from the Auto Loan Fund to buy the fund's sole
supplier of auto loans for himself, Hall, and Mok. This created a
pervasive conflict of interest as Chui, Hall, and Mok had a duty to
maximise the fund's performance while at the same time had an
interest in generating profits for the loan supplier they secretly
owned.
The SEC also found that Chui used millions in cash borrowed from the
Auto Loan Fund to prop up other hedge funds he managed. By late 2008,
roughly 40 per cent of the Auto Loan Fund's assets consisted of
"loans" to the fund managers' related businesses – with fund
investors being charged fees based on these undisclosed related-party
payments.
According to the SEC's order, Chui, Hall and Mok then essentially
wiped much of this debt to the fund off the books by selling assets to
the fund at a 300 per cent mark-up. Chui, with help from Hall and Mok,
purchased an auto loan portfolio for USD12m in February 2009 and then
sold it to the Auto Loan Fund the same day for more than USD38m. The
fraudulently inflated sale was used to erase money owed to the fund
for the various related-party transactions.
The Commission's order finds violations of multiple antifraud
statutes by Chui, Hall, Mok, and their two adviser firms. Without
admitting or denying the SEC's findings, the respondents agreed to
the following settlement terms. Chui agreed to pay a USD175,000
penalty and be barred from associating with an investment adviser for
five years. Hall agreed to pay a USD100,000 penalty and be barred from
associating with an investment adviser for three years and from
appearing or practicing before the Commission as an attorney for three
years. Mok agreed to pay a USD75,000 penalty and be suspended from
associating with an investment adviser for one year. The two adviser
firms must disgorge USD850,000 in management fees deemed improper by
the SEC.
Source: Hedgeweek.com
