The Securities and Exchange Commission has charged a New York investment management firm and its principal for operating a large-scale scheme that defrauded hundreds of investors of mil
The Securities and Exchange Commission has charged a New York investment management firm and its principal for operating a large-scale scheme that defrauded hundreds of investors of millions of dollars.
The firm provided investors with misleading marketing materials that significantly overstated investment returns and misrepresented the value of the assets under management.
The SEC is seeking a court order to freeze the assets of Westgate Capital Management and its managing member James M. Nicholson.
The SEC alleges that they solicited investors with false claims of an almost unbroken eight-year string of monthly investment successes. Neither the firm nor its principal is registered with the SEC.
The US Attorney’s Office for the Southern District of New York has announced parallel criminal charges against Nicholson.
‘It’s often said that if it seems too good to be true, it probably is,’ says Scott W. Friestad, deputy director of the SEC’s division of enforcement. ‘With information obtained through a complaint from a member of the public who was suspicious of Westgate’s rosy claims, we were able to aggressively pursue this case, assemble evidence rapidly, and coordinate our work with criminal authorities to allege this large-scale fraud.’
The SEC’s complaint, filed in federal district court in Manhattan, alleges that since at least January 2008, Nicholson and Westgate defrauded current and prospective investors in 11 hedge funds they managed by misrepresenting the value of the hedge funds to investors, and soliciting new investors with sales materials that claimed a nearly impossible record of investment success.
According to the SEC’s complaint, at least one Westgate fund claimed positive returns in 98 of 99 consecutive months.
The SEC alleges Nicholson sought to further his fraud by creating a fictitious accounting firm and providing some of his investors with bogus audited financial statements.
Nicholson apparently concocted this imposter firm under the name of an actual accountant while using his own telephone number and driver’s license to set up a ‘virtual office.’
According to the SEC’s complaint, by late 2008 the funds had sustained such losses that Nicholson and Westgate could no longer honour redemption requests. They hid the losses from investors with misrepresentations and false sales brochures. Nicholson further attempted to hide losses in the Westgate fund family by other devices. He closed one fund that was heavily invested in the bankrupt Lehman Brothers and folded its assets into another Westgate fund. He issued bad cheques to some investors seeking to cash out, and ultimately suspended all investor redemptions due to what he called investors’ ‘irrational behaviour’.
The SEC alleges that Westgate and Nicholson have violated the antifraud provisions of the federal securities laws. The SEC is seeking an emergency court order freezing the assets of Nicholson, Westgate, and the hedge funds; preventing the destruction of documents; granting expedited discovery; and requiring Nicholson and Westgate to provide accountings.
Additionally, the SEC seeks preliminary and permanent injunctions, disgorgement, and financial penalties against both defendants.
Nicholson was barred from the brokerage industry in 2001 for failing to reply or supplying false information in response to inquiries from the National Association of Securities Dealers (now known as the Financial Industry Regulatory Authority).
