Chicago-based independent futures brokerage and clearing firm R.J. O’Brien & Associates (RJO) has hired industry veteran Daniel Staniford as Executive Director, responsible for the firm’s institutional business development in New York and London.
Sunday, 4 December 2016
Last updated 1 day ago
Apr 26 2011 | 3:12pm ET
Correction: The original version of this article (dated March 2, 2011) incorrectly stated that Sean Ewing, co-founder and former CEO of Absolute Capital Management, owned the penny stocks that ACM allegedly bought and sold, which may have led to a conflict of interest. There is no evidence that Ewing steered Absolute Capital investments into U.S. penny stocks or that he owned or profited from the sale of U.S. penny stock investments. The article below has been updated to reflect the correction.
By Mikhail Iliev, Who's In My Fund? -- This is the tale of international hedge fund advisor Absolute Capital Management who many think cheated clients and investors to the tune of some $200 million.
One of the top executives at the firm was investment guru Florian Homm, a 6’8” former basketball player for Germany, holder of a Harvard MBA and a Liberian passport, who had had a stint at Merrill Lynch and Julius Baer. The other was Irish-born businessman Sean Ewing, who founded and launched the UK and European fund supermarket Fundsdirect, which he sold to Egg and Prudential in 2002.
ACM was founded in 2004, and in 2005 it acquired a series of existing funds that had been run by Homm since 2002. ACM was then listed on London’s AIM exchange in March of 2006. At ACM, Homm served as co-chief investment officer and Ewing served as chief executive officer and chairman. For a while, ACM and its funds enjoyed a relatively tranquil run on their way to a respectable $2.1 billion under management.
In mid-2007, it all came crashing down. Ewing resigned in July of that year, saying he wanted to spend more time with his family. Two months later Homm also resigned, then vanished without a trace.
As it turned out, Homm had invested approximately $500 million of ACM’s fund assets into “pink sheet” stocks -- stocks in companies that cannot meet the requirements to be listed on a national securities exchange. Such stocks are universally recognized in the securities industry to be illiquid, thinly traded, and speculative.
On top of that, ACM’s trades in these speculative companies were the only market activity for most of these pink sheet stocks. After the revelation, the value of ACM’s funds promptly plunged by more than 40 percent and shell-shocked investors began looking for the nearest courthouse.
A class action suit headed by Cascade Fund was launched in June 2008 alleging an international fraud based on the funds’ buying and selling hundreds of millions of dollars of U.S. penny stocks at inflated prices. Homm, the class action stated, already owned the cheap stocks so the funds’ trading served to increase the stocks’ price to the enormous benefit of Homm, but to the ruination of the hedge funds.
The class action came to a screeching end when a federal judge threw out the case for a “failure to state a claim with sufficient particularity.”
That’s legalese for telling the plaintiff: You make your case sound so weak in your preliminary documents that the court sees no point in even digging deeper. Which is a shame because reading the ruling here, and especially having the benefit of a second, later suit against the same defendants (more on that below) one feels that Cascade’s lawyers were either too incompetent or too hasty to research and present their case properly. What one does not feel is that justice was served.
And when one digs deeper, the conflicts of interest are profound. Homm owned 50 percent of the broker that did most of the trades in the penny stock. He also owned millions of the pink sheets’ company shares. And, most tellingly, Homm had fled and was nowhere to be seen.
But this was only Act 1 of the show.
Act 2 began last summer when the funds themselves banded together and sued Homm, Ewing and the other officers of ACM in New York saying, in persuasive detail, they lost $195 million because Homm directed the funds to buy artificially inflated stock of the pink sheet companies. The lawsuit stated that Ewing “allegedly knew of the fraud, yet did not report it to ACM or the Funds.”
This case was also thrown out before the substance of the accusations could be aired out. The matter, Judge Daniels said, was simply outside the reach of U.S. law.
The judge relied on a brand new theory of how far U.S. laws extend. That theory came out of a case, Morrison v. NAB, where the U.S. Supreme Court ruled that U.S. laws will only apply to sales of a stock listed on an American stock exchange. Because the penny stocks were not traded on a U.S. exchange, but were bought by Cayman-based funds in a privately arranged off-exchange deal, the funds could not use the U.S. courts to sue.
But here is the kicker. The funds sued in June. The Morrison ruling, which made it impossible for the judge to even look at the case, became law of the land in July. And Judge Daniels issued his verdict in December. How is that for dumb luck?
So, the hedge fund investors fought the law (twice) and, on account of likely counsel bungling and lucky timing, the law lost both times.
Homm, by the way, was still “in hiding,” as Judge Daniels called it.
Now comes Act 3 as the Securities and Exchange Commission gets in on the action.
The regulator has taken some lessons from Act 1 to heart. Its complaint, filed this Thursday (February 24) against Homm and other defendants, but not against Ewing, is very fact-specific and full of data -- no doubt to avoid the “plead with particularity” pitfall of the failed class action.
The SEC is also benefitting from another legal twist, hot-off-the-presses. Like both actions before it, the agency, too, accused the defendants of securities fraud.
How, you may ask, will it get around Morrison with the same claim the victim funds used to no avail? Well, it simply doesn’t have to.
Right after Morisson, Congress looked long and hard at what the Supreme Court had said and retorted to it: When it comes to government action, we don’t need judges telling us how far the law that we make can reach. So lawmakers, by passing the Dodd-Frank Act, allowed agencies such as the SEC to do something a party like the victim funds could not, i.e. to bring cases not involving shares bought on U.S. exchanges.
What happens next is anybody’s guess, but we will stay tuned as this is just too good a tale to pass up.
Mikhail Iliev is a contributing editor of Who's In My Fund?, a site which groups hedge fund investors by investment, allowing them to communicate directly and discreetly with each other in a secure environment and share news and opinion on their investments. Mikhail practiced law for 11 years as an associate at Dewey LeBoeuf, LLP and as Senior Vice President at KBC Financial Products. He has extensive experience in the field of securities law and private investments and has advised clients on financing and offering matters for domestic and offshore funds, mergers and acquisitions and securities regulation. He is also a visiting professor at Segal Graduate School of Business in Vancouver, Canada where he has taught courses on securities regulation and ethics.