On Wednesday, March 28, 2012, United States District Judge Robert W Sweet of the Southern District of New York entered a final judgement in favour of the US Securities and Exchange Commission ordering total monetary relief of USD98.6 million from Pentagon Capital Management (PCM) and CEO Lewis Chester.
The final judgment enjoins PCM, a United Kingdom based hedge fund adviser, and its chief executive officer, Chester, from violating the anti-fraud provisions of the securities laws, Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder. In addition, the final judgment orders PCM and Chester, on a joint and several basis with their hedge fund client Relief Defendant Pentagon Special Purpose Fund, Ltd, to pay USD60,204,423.20, representing USD38,416,500 in disgorgement of their ill-gotten gains and USD21,787,923.20 in prejudgment interest. Finally, the final judgment imposes a civil money penalty of USD38,416,500, on a joint and several basis, against PCM and Chester.
Previously, on 15 February, 2012, the Court issued an Opinion finding that Defendants “intentionally, and egregiously,” violated the anti-fraud provisions of the securities laws by engaging in a late trading scheme to defraud United States mutual funds. Late trading refers to the practice of placing orders to buy, redeem, or exchange U.S. mutual fund shares after the time as of which the funds calculate their net asset value (usually as of the close of trading at 4:00 pm ET), but receiving the price based on the net asset value already determined as of 4:00 pm. The same day that the Court entered the final judgment, the Court also issued an Opinion explaining its decision to impose a penalty equal to the disgorgement ordered because, inter alia,
“Defendants understood that late trading was illegal and acted with marked scienter, going to great lengths to seek out, structure, and maintain the ability to deceive the funds into accepting their late trades and attempting to cover up their late trading after the fact.”
Chester, age 43, is a resident of London, England. PCM is an investment adviser and investment manager based in London, England, and is registered with the United Kingdom Financial Services Authority. Pentagon Special Purpose Fund, Ltd is an international business company incorporated in the British Virgin Islands.