The Securities and Exchange Commission has charged two San Francisco-based investment adviser firms along with their former chief executive, former general counsel, and former portfolio manager with defrauding investors in a USD100m hedge fund that invested in sub-prime automobile loans.
The SEC found that chief executive Benjamin P. Chui and portfolio manager Triffany Mok – who managed the American Pegasus Auto Loan Fund – together with general counsel Charles E. Hall, Jr., engaged in improper self-dealing, misused client assets, and failed to disclose conflicts of interest.
The firms – American Pegasus LDG and American Pegasus Investment Management –and Chui, Hall, and Mok settled the SEC’s charges by agreeing to sanctions including bars from the industry and more than USD1m in penalties and repayments to the fund.
“Fund advisers have a duty to disclose conflicts of interest and act in the best interests of clients whose assets they are entrusted to manage,” says Marc Fagel, director of the SEC’s San Francisco regional office. “Instead, Chui, Hall, and Mok created a tangled financial web, using investor funds for their personal benefit and then attempting to paper over the misconduct by inflating the value of fund assets.”
The SEC’s order instituting administrative proceedings finds that unbeknownst to investors, in mid-2007, Chui used more than USD18m in loans and advances from the Auto Loan Fund to buy the fund’s sole supplier of auto loans for himself, Hall, and Mok. This created a pervasive conflict of interest as Chui, Hall, and Mok had a duty to maximise the fund’s performance while at the same time had an interest in generating profits for the loan supplier they secretly owned.
The SEC also found that Chui used millions in cash borrowed from the Auto Loan Fund to prop up other hedge funds he managed. By late 2008, roughly 40 per cent of the Auto Loan Fund’s assets consisted of “loans” to the fund managers’ related businesses – with fund investors being charged fees based on these undisclosed related-party payments.
According to the SEC’s order, Chui, Hall and Mok then essentially wiped much of this debt to the fund off the books by selling assets to the fund at a 300 per cent mark-up. Chui, with help from Hall and Mok, purchased an auto loan portfolio for USD12m in February 2009 and then sold it to the Auto Loan Fund the same day for more than USD38m. The fraudulently inflated sale was used to erase money owed to the fund for the various related-party transactions.
The Commission’s order finds violations of multiple antifraud statutes by Chui, Hall, Mok, and their two adviser firms. Without admitting or denying the SEC’s findings, the respondents agreed to the following settlement terms. Chui agreed to pay a USD175,000 penalty and be barred from associating with an investment adviser for five years. Hall agreed to pay a USD100,000 penalty and be barred from associating with an investment adviser for three years and from appearing or practicing before the Commission as an attorney for three years. Mok agreed to pay a USD75,000 penalty and be suspended from associating with an investment adviser for one year. The two adviser firms must disgorge USD850,000 in management fees deemed improper by the SEC.
