SEC Sues Hedge Fund Manager for Using Cross-Trades to Hide Losses
The SEC has filed a civil enforcement action against a hedge fund manager and its controlling principal for using cross-trades among advised funds to hide losses. The SEC alleges that the defendant sought to hide losses at one fund by purchasing securities from an affiliated fund at a significant discount and then immediately marking up the securities. To hide losses at the seller fund, the defendant allegedly lied to the administrator and the third party valuation agent about the timing of the purchases of certain other securities so that it appeared that such securities were also purchased at a significant discount. The SEC says that both the third party administrator and the prime broker questioned the cross trades but that the defendant outright lied in written certifications about the legality of the cross-trades.