Respondents to Pay over $35 Million in Disgorgement
Washington, D.C., Dec. 22, 2005- LAWFUEL – The Law News Network -The Securities and Exchange Commission today announced a settled enforcement action against two hedge funds, their investment adviser, and two of its senior executives.
Named in the action were Veras Capital Master Fund (VCM), VEY Partners Master Fund (VEY), their investment adviser, Veras Investment Partners, LLC, (VIP), and its managing members, Kevin D. Larson and James R. McBride.
The Commission issued an Order that finds the Respondents engaged in a fraudulent scheme to market time and late trade mutual fund shares. The Respondents will pay $35,554,903 in disgorgement and $645,585 in prejudgment interest. Additionally, Larson and McBride each will pay a $750,000 penalty and each will be barred from association with any investment adviser. They will retain the right to reapply for association after 18 months.
Linda Chatman Thomsen, Director of the Division of Enforcement, said, “Today’s action demonstrates the Commission’s continued commitment to prosecute vigorously hedge funds that employ fraudulent market timing and late trading practices.”
Merri Jo Gillette, Director of the Midwest Regional Office, added, “By using deceptive means to late trade and market time mutual funds, Veras profited illegally and at the expense of ordinary investors.”
The Commission’s Order finds that from January 2002 through September 2003, Veras used deceptive techniques to market time mutual funds that either prohibited market timing or limited the frequency of trades in order to prevent market timing. To evade the mutual funds’ restrictions, Veras created legal entities with names unrelated to Veras to hide its true identity from mutual funds. Veras used the legal entities to open multiple accounts at multiple broker-dealers to evade the trading restrictions imposed by mutual funds. Veras also used the multiple accounts to divide trades into smaller dollar amounts that would more likely evade detection by the mutual funds. Additionally, the Commission’s Order finds that Respondents traded mutual fund shares after 4:00 p.m. Eastern Time (ET) and received the same day’s price.
Specifically, the Commission’s Order found that the Respondents engaged in the following conduct:
· Respondents executed a high volume of trades in mutual funds. Numerous mutual funds complained to intermediary institutions about the Veras hedge funds’ market timing activities or blocked the Veras hedge funds’ accounts from future trading. To evade the mutual funds’ trading restrictions, Respondents employed deceptive techniques to hide the identity of the Veras hedge funds from the mutual funds in which they traded. One such deceptive technique was the creation of legal entities with names unrelated to Veras. Larson and McBride created eight such entities.
· Respondents used these entities to open multiple accounts at multiple broker-dealers, which Respondents traded through to, among other things, evade the restrictions imposed by the mutual funds on trading. Respondents also used the multiple accounts to divide trades into smaller dollar amounts that would more likely evade detection by the mutual funds.
· Respondents also were permitted to submit late trades to dealers in mutual fund shares and to two mutual fund companies, which routinely allowed Respondents to communicate orders to purchase and sell mutual fund shares after 4:00 p.m. ET at that day’s price. In some instances, Respondents communicated orders to these entities before 4:00 p.m. ET and then confirmed, altered, or cancelled the orders after 4:00 p.m. ET. In some instances, Respondents used information obtained after 4:00 p.m. ET to make their trading decisions. In fact, one of the Veras hedge funds’ proprietary trading models incorporated information obtained from the futures market between 4:00 p.m. ET and 4:15 p.m. ET to generate a signal to buy or sell.
The Commission’s Order finds that by engaging in the fraudulent conduct summarized and described above, the Respondents willfully violated Section 17(a) of the Securities Act, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; willfully aided and abetted and caused another’s violations of Section 17(a) of the Securities Act, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; and willfully aided and abetted and caused violations of Rule 22c-1(a) under the Investment Company Act
Without admitting or denying the Commission’s findings, the Respondents have consented to entry of an Order that: (1) requires the Respondents to cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and from causing any violations and any future violations of Rule 22c-1(a) under the Investment Company Act; (2) bars Larson and McBride from association with any investment adviser, and prohibits them from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter, with the right to reapply for association in all capacities after 18 months to the appropriate self-regulatory organization, or if there is none, to the Commission; (3) orders the Respondents to pay, on a joint and several basis, $35,554,903 in disgorgement and $645,585 in prejudgment interest; and (4) orders Larson and McBride to each pay a civil money penalty in the amount of $750,000. The money will be placed in a Fair Fund for distribution to the affected mutual funds.
In determining to accept the settlement, the Commission considered Veras’ cooperation in this investigation.
The Commission’s action was brought contemporaneously with related actions by the Attorney General of the State of New York and the Commodity Futures Trading Commission.