CFTC freezes assets in fraud action involving hedge fund

The CFTC announced that on June 21, 2005, a federal court in Pennsylvania entered a restraining order against defendants, freezing defendants’ assets, preventing the destruction or alteration of their books and business records, and appointing a receiver to take control of defendants’ assets.

The court’s order arises from a CFTC complaint filed earlier that day, alleging that — since at least October 2002 — Philadelphia Alternative Asset Management Co., LLC (PAAM), a registered commodity pool operator, and Eustace, a registered associated person and President of PAAM, fraudulently solicited prospective pool participants and accepted at least USD 680,000 from at least one member of the general public as an investment in a commodity trading pool and purported hedge fund, Philadelphia Alternative Asset Fund, LP., that could trade, among other things, commodity futures and options.

The complaint alleges that defendants issued false statements to at least one pool participant reflecting that the pool profitably traded commodity futures and options contracts, and showing, as of January 2005, that the pool participant’s account had increased in value to over USD 1 million when, in fact, as defendants admitted, the pool never traded futures or options.

Furthermore, according to the complaint, defendants fraudulently solicited another prospective pool participant by showing purportedly profitable trading results for the pool that, as alleged, were false, both because the pool had not traded futures and options, and because Eustace later claimed that they were based on hypothetical trading only.

The complaint further alleges that defendants also posted false trading results on the PAAM website for two other pools they operated, Philadelphia Alternative Asset Fund, Ltd., and Philadelphia Alternative Asset Feeder Fund, LLC.

Defendants began operating these pools in late 2004, eventually accepting over USD 230 million from pool participants, according to the complaint, and according to the PAAM website, these pools exclusively traded exchange-traded futures and options.

As of May 2005, defendants posted profitable month-to-date and year-to-date trading results on the website, when the only known commodity futures and options trading accounts showed that the accounts had sustained a 50 percent loss in the remaining value of the pool that month, according to the CFTC complaint.

The Honorable John R. Padova of the U.S. District Court for the Eastern District of Pennsylvania ordered a hearing on the CFTC’s motion for a preliminary injunction to take place on August 16, 2005.

In its ongoing litigation, the CFTC is seeking a permanent injunction against defendants, restitution to defrauded customers, disgorgement of ill-gotten gains, and a monetary penalty.

In bringing this action, the CFTC greatly appreciates the assistance of the National Futures Association.

The following CFTC Division of Enforcement staff members are responsible for this case: William Longwitz, Karen Kenmotsu, Gretchen L. Lowe, and Richard Wagner.