The Securities and Exchange Commission has filed an enforcement action against a Salt Lake City investment advisory firm and three of its principals for making undisclosed high-risk invest
The Securities and Exchange Commission has filed an enforcement action against a Salt Lake City investment advisory firm and three of its principals for making undisclosed high-risk investments that resulted in the near total loss of the assets in two hedge funds managed by the firm.
The SEC has charged Thompson Consulting, Kyle Thompson, David Condie and Sherman Warner with violations of the antifraud provisions of the securities laws by engaging in much riskier trading strategies than those described to investors, several of whom were retirees.
The US financial regulator alleges that Thompson, Condie and Warner managed the hedge funds and also made sales presentations to potential investors in which they emphasised the low-risk nature of Thompson Consulting’s investment strategy for the funds.
The SEC’s complaint, filed in the US District Court for the District of Utah, also alleges that Thompson Consulting’s deviations from its stated investment policy resulted in substantial losses to both the hedge funds and an individual client.
Among those departures from its stated strategy were failed investments in options on the stock of a sub-prime lender. The complaint also alleges that the defendants improperly transferred money from the hedge funds to the account they managed for the individual client to make up for the individual’s losses.
‘Today’s action demonstrates that an investment adviser employing a strategy inconsistent with its representations to investors will be called to account for losses incurred as a result of the undisclosed change in strategy,’ says Linda Chatman Thomsen, director of the SEC’s enforcement division.
‘In this case, the adviser’s conduct was particularly reprehensible because they improperly used their hedge fund clients’ remaining assets to reimburse losses incurred by a preferred individual client. In other words, they robbed one client to pay another.’
The complaint alleges that between March and August 2007, Thompson Consulting, in attempting to attain promised returns of 3 percent per month (or more than 36 percent per year), embarked on progressively riskier trading strategies without disclosing the change to the hedge funds’ investors.
The commission alleges that in early March, Thompson Consulting wrote options on the stock of New Century Financial Corporation, a sub-prime lender, for the accounts of the hedge funds, but sustained substantial losses when the price of the underlying stock collapsed later that month.
The complaint says Thompson Consulting had made the same investment on behalf of one of its individual clients. To make up for the losses suffered by that individual, the firm transferred USD3m from one of the hedge funds to the individual’s account.
In an effort to recoup earlier losses by the funds, the commission alleges, Thompson Consulting invested virtually all their assets in unhedged options on the VIX, the CBOE’s volatility index, in July and August.
Virtually all of the hedge funds’ assets were wiped out when the securities markets dropped sharply in mid-August. According to the complaint, between July 31 and August 17 the net asset value of the hedge funds fell from some USD54m to about USD200,000.
The SEC’s complaint seeks to enjoin Thompson Consulting, Thompson, Condie and Warner from future violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Sections 206(1) and (2) of the Investment Advisers Act of 1940. The complaint also seeks the imposition of civil penalties, payment of disgorgement and prejudgment interest by the defendants, and disgorgement from several relief defendants.
