Bay Area Hedge Fund Fined, Barred For Portfolio Pumping

Oct 23 2008 | 11:21am ET

The Securities and Exchange Commission has charged San Francisco-based hedge fund MedCap Management & Research and its principal, Charles Toney, with portfolio pumping.

The SEC alleges that Toney made extensive quarter-end buys of a thinly-traded penny stock in which his fund was heavily invested, more than quadrupling the stock price and allowing him to report artificially inflated quarterly results to fund investors.

According to the SEC, MedCap Partners was suffering from dramatic losses and facing increasing redemptions from fund investors by September 2006. Over the last four days of the month, Toney—through a separate fund that MMR managed—placed numerous buy orders for a thinly traded over-the-counter stock in which MedCap already was heavily invested. Toney's buying pressure caused the stock price to more than quadruple, from $0.85 to $3.72.

The SEC alleges that because the stock represented over one-third of MedCap's holdings, the brief boost in its price inflated MedCap's reported value by $29 million, masking what would otherwise have been a 40% quarterly loss. Immediately after the quarter ended, Toney reported to MedCap's investors that the fund's investments had begun to “bounce” and that the fund's performance was improving.

However, Toney failed to disclose that this “bounce” was almost entirely the result of his four-day purchasing spree. Following MMR's brief buying activity, both the stock price and MedCap's asset value declined to their previous levels. At the same time, MMR charged fees to the fund based on the inflated quarter-end asset value, according to the SEC.

Without admitting or denying the SEC's allegations, Toney has agreed to settle the charges by paying a $100,000 penalty and $70,633 in management fees plus interest and agreeing to an order barring him from acting as an investment adviser for at least one year.

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