SEC charges hedge fund advisory firm over scheme to misuse investor proceeds
The Securities and Exchange Commission (SEC) has charged a Florida-based hedge fund advisory firm and its founder with fraudulently shifting money from one investment to another without informing investors.
The firm’s founder and another individual later pocketed some of the transferred investor proceeds to enrich themselves.
The SEC alleges that Weston Capital Asset Management and its founder and president Albert Hallac illegally drained more than USD17 million from a hedge fund they managed and transferred the money to a consulting and investment firm known as Swartz IP Services Group. The transaction went against the hedge fund’s stated investment strategy and wasn’t disclosed to investors, who received account statements falsely portraying that their investment was performing as well or even better than before. Weston Capital’s former general counsel Keith Wellner assisted the activities.
The SEC further alleges that out of the transferred investor proceeds, Hallac, Wellner and Hallac’s son collectively received USD750,000 in payments from Swartz IP. Weston Capital and Hallac also wrongfully used USD3.5 million to pay down a portion of a loan from another fund managed by the firm.
“Investment advisers owe their clients a fiduciary duty of utmost good faith and full disclosure about what they’re doing with their money,” says Eric I Bustillo, director of the SEC’s Miami regional office. “Weston and Hallac dishonoured that duty with Wellner’s assistance by secretly steering investor proceeds to a third party and then pocketing some of those funds.”
Weston Capital, Hallac, and Wellner agreed to settle the SEC’s charges along with Hallac’s son Jeffrey Hallac, who is named as a relief defendant in the SEC’s complaint for the purposes of recovering ill-gotten gains in his possession. The court will determine monetary sanctions for Weston Capital and Hallac at a later date. Wellner and Jeffrey Hallac each agreed to pay USD120,000 in disgorgement.
According to the SEC’s complaint filed in US District Court for the Southern District of Florida, Weston Capital managed more than a dozen unregistered hedge funds in early 2011 with combined total assets of approximately USD230 million. One of the funds managed by the firm was Wimbledon Fund SPC, which was segregated into five separate classes of investment portfolios. The Class TT Segregated Portfolio was required to invest all of its investor money in a diversified multi-billion hedge fund called Tewksbury Investment Fund which invested in short-term, low risk interest bearing accounts and US Treasury Bills.
The SEC alleges that in violation of its stated investment strategy, Weston Capital and Hallac redeemed TT Portfolio’s entire investment in the Tewksbury hedge fund and transferred the money to Swartz IP. The transaction was not disclosed to investors and Weston Capital and Hallac solicited and received investments for the TT Portfolio during this time while knowing the funds would not be invested in Tewksbury. As soon as Swartz IP received the money transfers, it disbursed the funds primarily to a special purpose entity created to support and finance varying medically related business ventures.
The SEC’s complaint alleges that Weston and Hallac violated federal anti-fraud laws and rules as well as Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8, and that Wellner aided and abetted these violations. Without admitting or denying the allegations, Weston Capital, Hallac, and Wellner consented to the entry of a judgment enjoining them from future violations of these provisions.
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