Wed, 19/09/2007 - 06:59
The US Commodity Futures Trading Commission has announced that a federal district court in Chicago has entered a preliminary injunction order against Bermuda-incorporated hedge fund manager Lake Shore Asset Management.
The order freezes Lake Shore's assets and prohibits the firm from destroying documents and from engaging in any activity related to commodity futures and options trading. The court issued the order following a three-day hearing during which the firm argued that the US government had no right to inspect its customer and trading records.
The district court concluded that LSAM, together with the Lake Shore Group of Companies and a predecessor firm also called Lake Shore, operated as a common enterprise that transacted business through a maze of interrelated companies.
Specifically, the court found that while marketing documents touted a record of highly profitable trading and claimed the firm had USD1bn under management, the records of known trading accounts for the funds managed by Lake Shore showed losses totalling about USD9m. Based on this, and evidence of other discrepancies, the court concluded that an asset freeze was necessary to protect customer funds.
Lake Shore immediately appealed the order and requested that the Court of Appeals stay the order freezing assets pending the appeal, but the freeze remains in effect after the Court of Appeals for the seventh circuit denied the firm's request.
Complicating matters, a portion of the funds frozen by the court are held at Sentinel Management Group, a registered futures commission merchant in Northbrook, Illinois that itself filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on August 17 and has also been accused of misuse of client assets.
In its continuing litigation against LSAM, the Lake Shore Group, and Philip J. Baker, Lake Shore's London-based principal, managing director and president, the CFTC is seeking permanent injunctive relief, production of records, the return of funds to defrauded customers, the repayment of ill-gotten gains, and civil monetary penalties for each violation of the Commodity Exchange Act.
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