Petters-Linked Hedge Fund Hit With SEC Suit

Nov 10 2011 | 9:59am ET

The Securities and Exchange Commission yesterday sued a pair of hedge fund executives for their alleged roles in the Thomas Petters Ponzi scheme.

The regulator laid charges against Arrowhead Capital Management founder James Fry and the firm's former finance chief, Michelle Palm, as well as the now-defunct Arrowhead. According to the SEC, Fry, who was arrested in July and is facing criminal charges, and Palm, who has already pleaded guilty in the case and is cooperating with prosecutors, helped Petters cover up his fraud by arranging secret note extensions with Petters and by lying to investors about the source of payments that were supposed to come from electronics retailers.

The SEC said that Arrowhead earned $42 million in fees funneling some $600 million in assets to Petters, who was convicted two years ago and sentenced to 50 years in prison for running the $3.65 billion fraud.

"Fry and Palm presented themselves as protectors of their hedge fund investors when in fact they were facilitators of the Petters Ponzi scheme," the head of the SEC's Chicago office, Merri Jo Gillette, said. "Arrowhead's promises were filled with lies and deceit, and as a result investors lost more than $600 million while Fry pocketed millions in fees."

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