SEC Sues Hedge Fund Manager For $16 Million Fraud

Feb 19 2009 | 12:58am ET

The Securities and Exchange Commission has sued a former Minnesota hedge fund manager, alleging that he defrauded investors of almost $16 million.

The lawsuit, filed yesterday in Minneapolis federal court, accuses John Lawton of lying to investors about the performance of his Paramount Partners hedge fund, overstating its balance sheet to hide losses. Lawton, who moved his firm, Crossroad Capital Management, from Wayzata, Minn., to San Francisco last year, has denied the allegations.

According to the complaint, Lawton collected some $10.8 million from 54 investors between 2001 and 2008. He allegedly claimed the fund was returning between 19% and 65% annually, and had “only one losing year, 2004, in which Paramount supposedly lost approximately 5%.” On Dec. 31, Crossroad apparently sent investors documents claiming it managed $17 million.

In fact, according to the SEC, the fund was worth just $5.3 million at the end of last year, and is now worth just $1.3 million. The regulator said Lawton show it financial statements showing the missing $12 million in a brokerage account, but when it contacted the brokerage firm, the firm said the account had been closed in June.

U.S. District Judge Ann Montgomery—who is also overseeing the case of accused hedge fund fraudster Tom Petters—ordered Lawton to appear in court by this afternoon. At today’s hearing, she is expected to rule on the government’s bid for an emergency restraining order shutting him down.

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