Aletheia Hit With Cherry-Picking Lawsuit

Dec 17 2012 | 11:12am ET

The Securities and Exchange Commission Friday sued hedge fund Aletheia Research and Management for allegedly defrauding investors for its founder's profit.

The lawsuit, filed in Los Angeles federal court, accuses Aletheia and founder Peter Eichler of "cherry-picking" profitable trades for his own account and those of favored clients, leaving the losing bets for other investors to bear. The scheme cost Aletheia investors $4.1 million in winning trades while saddling them with trades that lost $4.4 million.

"Aletheia and Eichler had an obligation to treat all clients with equal fairness, but instead they cherry-picked winners and losers and unfairly disadvantaged investors in two hedge funds to profit themselves," Michele Wein Layne of the SEC's Los Angeles office said.

Eichler, which received a Wells notice indicating an enforcement action was imminent last month, said he is cooperating with the SEC and that he "did not intentionally or otherwise harm any of [Aletheia's] investment products or its clients."

According to the SEC, Aletheia, which once managed $10 billion but which is down to just $1.4 billion and which filed for bankruptcy protection last month, and Eichler launched the scheme in 2009. Since then, trades allocated to Eichler's own accounts made money 98% of the time, compared to just 32% for those trades allocated to the firm's hedge funds.

The SEC also alleges that Aletheia failed to warn clients of its perilous financial state.

Aletheia already last year settled SEC charges that it failed to keep sufficient records. And it is under criminal investigation; the U.S. Attorney's Office in Los Angeles has asked to be notified of all pleadings in the hedge fund's bankruptcy.

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