Thursday, 20 October 2016
Last updated 20 min ago
Dec 5 2011 | 12:34pm ET
The Securities and Exchange Commission has taken action against a pair of hedge funds, accusing them of, among other improprieties, hiding copious conflicts of interests from clients both potential and actual.
The two lawsuits, filed last month, are the product of the aberrational performance inquiry, in which the SEC uses proprietary risk analytics to evaluate hedge fund returns. In addition to announcing the cases against LeadDog Capital Markets, Solaris Management and their principals, the SEC also trumpeted two other civil actions, one previously announced, against a former Millennium Global Investments manager and his broker, and against ThinkStrategy Capital Management and founder Chetan Kapur.
"We're using risk analytics and unconventional methods to help achieve the holy grail of securities law enforcement—early detection and prevention," SEC enforcement chief Robert Khuzami said. "This approach, especially in the absence of a tip or complaint, minimizes both the number of victims and the amount of loss while increasing the chance of recovering funds and charging the perpetrators."
The SEC said it has initiated administrative proceedings again LeadDog and its owners, Chris Messalas and Joseph LaRocco. The regulator alleges that LeadDog, Messalas and LaRocco misrepresented and withheld substantial conflicts of interest in the hedge fund's investments, including the fact that Messalas controlled or was a substantial investor in many of the companies in which LeadDog invested.
LeadDog and its owners also allegedly hid Messalas' "negative regulatory history" and Messalas' and LaRocco's compensation arrangements, and lied to investors about the fund's liquidity, telling one elderly client that at least half of its assets could be marked to market on a daily basis.
The SEC also sued Chicago-area hedge fund Solaris and its owner, Patrick Rooney, accusing them of much the same as LeadDog. The regulator alleges that Rooney invested all of Solaris' assets in a company that he served as chairman, including via no-interest loans. Rooney allegedly hid the investments, in Positron Corp., until 2009, when he lied to investors about having become chairman of the micro-cap company to safeguard Solaris' investments. In fact, he has been the company's chairman since 2004.
Solaris and Rooney made the investment in spite of the firm's professed investment strategy, the SEC alleges.