Washington, D.C., March 4, 2008 – LAWFUEL.com – The Securities and Exchange Commission today announced the filing of an enforcement action against a Salt Lake City investment adviser and three of its principals for making undisclosed high-risk investments that resulted in the near total loss of the assets in two hedge funds managed by the adviser.
The SEC charged Thompson Consulting, Inc., Kyle Thompson, David Condie and Sherman Warner with violations of the antifraud provisions of the securities laws by engaging in much riskier trading strategies than those described to investors, several of whom were seniors.
The Commission alleges that Thompson, Condie and Warner managed the hedge funds and also made sales presentations to potential investors in which they emphasized the safety of Thompson Consulting’s investment strategy for the funds.
The SEC’s complaint, filed in the U.S. District Court for the District of Utah, also alleges that Thompson Consulting’s deviations from its stated investment policy resulted in substantial losses to both the hedge funds and an individual client.
Among those departures from its stated strategy were failed investments in options on the stock of a subprime lender. The SEC’s complaint further alleges that the defendants improperly transferred money from the hedge funds to the account they managed for the individual client to make up for the individual’s losses.
“Today’s action demonstrates that an investment adviser employing a strategy inconsistent with its representations to investors will be called to account for losses incurred as a result of the undisclosed change in strategy,” said Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement. “In this case, the adviser’s conduct was particularly reprehensible because they improperly used their hedge fund clients’ remaining assets to reimburse losses incurred by a preferred individual client. In other words, they robbed one client to pay another.”
The SEC’s complaint alleges that from March through August 2007, Thompson Consulting, in attempting to attain promised returns of 3 percent per month (or more than 36 percent per year), embarked on progressively riskier trading strategies without disclosing the change in strategy to the hedge funds’ investors.
The Commission alleges that in early March 2007, Thompson Consulting wrote options on the stock of New Century Financial Corp., a subprime lender, for the accounts of the hedge funds, sustaining substantial losses when the price of the underlying stock collapsed later that month.
The Commission alleges that Thompson Consulting had made the same investments on behalf of one of its individual clients. To make up for the losses suffered by that individual, Thompson Consulting improperly transferred $3 million from one of the hedge funds to the individual’s account.
In an effort to recoup earlier losses by the hedge funds, the Commission alleges Thompson Consulting invested virtually all the hedge funds’ assets in unhedged options on the VIX, the CBOE’s volatility index, in July and August 2007. Virtually all of the hedge funds’ assets were wiped out when the securities markets dropped sharply in mid-August. According to the Commission’s complaint, from July 31 to Aug. 17, 2007, the net asset value of the hedge funds fell from approximately $54 million to approximately $200,000.
The SEC’s complaint seeks to enjoin Thompson Consulting, Thompson, Condie and Warner from future violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Sections 206(1) and (2) of the Investment Advisers Act of 1940. The complaint also seeks the imposition of civil penalties, payment of disgorgement and prejudgment interest by the defendants, and disgorgement from several relief defendants.