SEC Sues Pentagon For Defrauding Mutual Funds

Apr 4 2008 | 2:00am ET

Last week, Pentagon Capital Management announced it would close shop in expectation of a regulatory complaint. Yesterday, that complaint came.

The U.S. Securities and Exchange Commission filed suit against the London-based hedge fund, which manages £1.1 billion (US$2.2 billion), and its CEO for allegedly improper mutual fund trading practices.

According to the SEC, Pentagon defrauded U.S. mutual funds through a late-trading and market-timing scheme it ran from about June 1999 to September 2003. The regulator said the firm’s Special Purpose Fund earned some $62 million in ill-gotten gains, with Pentagon and CEO Lewis Chester reaping the incentive fees.

“PCM actively traded U.S. mutual funds through Pentagon Fund’s accounts at numerous broker-dealers in the United States,” the complaint, filed in federal court in New York, said.

Lawyers for Pentagon say they will demonstrate their clients’ innocence in court.

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