Hedge Fund Manager Used New Funds to Pay Expenses of Old Funds

A hedge fund manager agreed to pay $7.9 Million in disgorgement and a $5 Million fine for using the assets of newer funds to pay the expenses of older funds.  According to the SEC complaint, which was filed in 2010 and related to allocations made between 2005 and 2008, the respondent used assets from more recent funds to pay legal and administrative fees of older funds that could not raise cash because they held illiquid securities.  The SEC claims that the respondent replaced the cash with overvalued illiquid securities.  The SEC continues litigation with respect to charges that the hedge fund manager overvalued securities and made misrepresentations.

OUR TAKE:  The long arm of the law can reach back a long way.   The older funds began to have liquidity problems as far back as 2004, which caused the respondent to raise more assets to pay off old expenses.  And, the litigation continues.