The Securities and Exchange Commission has filed a civil action against UK hedge fund manager Headstart Advisers and its chief investment adviser, Najy N.
The Securities and Exchange Commission has filed a civil action against UK hedge fund manager Headstart Advisers and its chief investment adviser, Najy N. Nasser, alleging fraud relating to late trading in mutual fund shares and deceptive market timing strategies at the expense of the funds and other shareholders. The firm rejects the allegations.
The SEC’s suit is the second filed within less than a fortnight against a UK-based hedge fund manager in the Southern District of New York, following an action alleging late trading fraud against London-based Pentagon Capital Management and its chief executive Lewis Chester.
The action in the US District Court for the Southern District of New York against Headstart and Nasser alleges that they orchestrated a scheme to defraud US mutual funds and their shareholders through late trading and deceptive market timing and that the firm’s Headstart Fund, named as a relief defendant, benefited from some USD198m million in illicit profits.
Headstart has rebutted the SEC’s allegations, saying that they relate to a ‘now obsolete’ fund and that a review by the firm’s own regulator in the UK, the Financial Services Authority, found ‘nothing improper or irregular’ in its actions.
The SEC complaint notes that Nasser, a resident of Monaco, joined Headstart in 1997 and that the firm was formerly known as Folkes Asset Management. The Headstart Fund was incorporated in the Bahamas in December 2001.
The regulator alleges that between September 1998 and September 2003, Headstart actively traded US mutual funds through the fund’s accounts with various US broker-dealers and routinely engaged in late trading of mutual funds, placing orders on behalf of the Headstart Fund to buy, redeem, or exchange mutual fund shares after the 4.00 p.m. Eastern Time market close while still receiving the current day’s mutual fund price.
An illegal practice, this enabled the fund to profit, at the expense of other shareholders in the mutual funds, from market events that occurred after the close but that were not reflected in the price that it paid for the mutual fund shares.
The SEC says Headstart and Nasser also used deceptive techniques to carry out market timing of mutual funds, opening numerous accounts on behalf of the Headstart Fund at various US broker-dealers and splitting trades among multiple accounts to keep their size below a threshold monitored by mutual funds in order to conceal the extent of the fund’s trading. If a mutual fund discovered the practice, Headstart would simply switch trading to a different brokerage account of which the fund was unaware.
The suit says: ‘Headstart and Nasser obtained ill-gotten gains from the late trading and deceptive market timing scheme through, among other things, their receipt of performance and management fees for managing the Headstart Fund.’
It alleges that they violated Section 17(a) of the Securities Act of 1933, and violated, or aided and abetted violations of, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5. The complaint seeks a permanent injunction against the defendants, the disgorgement of the illicit profits with interest, and civil monetary penalties.
In a statement rejecting the allegations, Headstart said: ‘The complaint relates to the trading activities of a historic but now obsolete Bahamian fund previously within the Headstart family of funds. No claims are made against any of the current Headstart funds and the assets of those funds are not in any way subject to the SEC’s complaint. Those assets are not in any way at risk as a result of the actions taken by the SEC.
‘The investment activities that the complaint relates to have already been reviewed extensively by Headstart Advisers’ own regulator in the UK, the Financial Services Authority. The FSA was satisfied, as Headstart is, that there was nothing improper or irregular in the actions now complained of. Headstart is confident that the complaint is utterly misguided and it will vigorously defend the SEC’s contentions.’
