HEDGE FUND MANAGERS SUED AND INDICTED FOR MISLEADING INVESTORS ABOUT FAILING FUNDS
The SEC filed a lawsuit against two hedge fund portfolio managers alleging that they fraudulently misled investors about the deteriorating condition of the funds they managed. In a related action, the U.S. Attorney announced a criminal indictment against the portfolio managers. The SEC alleged that the funds collapsed due to over-exposure to subprime mortgages. As the fund was deteriorating, the SEC claims the portfolio managers understated the funds’ exposure to the subprime market, inflated valuations, offered sanguine predictions on the market, and failed to disclose redemption activity. Communications occurred during investor conference calls and written reports delivered to investors. According to the SEC, one of the portfolio managers also redeemed his own money while misleading other investors to subscribe to the funds.
OUR TAKE: This will be a seminal case to establish a fund manager’s disclosure obligations when facing a rapidly deteriorating market.