The SEC has filed an emergency enforcement action to halt fraudulent conduct concerning Tenet Capital Partners Convertible Opportunities Fund, LP.
In addition to the above hedge fund, the SEC' s action also relates to its investment adviser, Tenet Asset Management, LLC and Tenet's principal, Jon E. Hankins. Also on June 22, 2005, the court granted the Commission's application for a temporary restraining order which included, among other things, the appointment of a temporary receiver over the Convertible Opportunities Fund and Tenet.
The Complaint alleges that the Convertible Opportunities Fund, Tenet, and Hankins concealed, and are continuing to conceal, from investors large investment losses and are seeking to unfairly honor a redemption request at inflated values to cover up the fraud. According to the SEC, Hankins and Tenet have recently made numerous false statements to investors of the Convertible Opportunities Fund, as well as to investors in another hedge fund managed by Tenet and Hankins, Tenet Offshore Capital Partners Ltd. ("Offshore Capital Partners") (collectively, the "Funds").
The Complaint also alleges that within the last four months, in an effort to raise new capital for the Funds, Hankins met with investors and made false representations concerning Tenet's investment strategy and the Funds' performance.
Hankins allegedly also provided investors with deceptive and false marketing materials that, among other things, grossly misrepresented the performance of the Convertible Opportunities Fund during the period April through December 2004. While the marketing materials for the Convertible Opportunities Fund reflected a gain of more than 32% during that period, the Convertible Opportunities Fund's audited financial statements for that period reflect that the fund returned a 24% loss during the period.
In addition, as recently as May 25, 2005, the SEC alleges Hankins distributed to at least one investor altered audited financial statements for 2004 for the Convertible Opportunities Fund. The altered 2004 audited financial statements: (a) concealed the fund's reported USD1.4 million net loss in 2004; (b) falsely stated that the fund had net assets of USD 31.2 million when, in fact, it reported only USD 4.2 million; and (c) falsely stated that the fund earned 32.4% in investment returns when, in fact, it reported a 24.5% loss.
The Complaint further alleges that Defendants are also seeking to improperly distribute assets to cover up the fraud. Recently, to assuage the concerns of one investor, Hankins requested that the Funds' prime broker redeem this investor's funds from the Convertible Opportunities Fund's account (a total of $3 million) at a level of redemption inconsistent with the losses incurred in the fund's accounts. Although the prime broker has not acted on Hankins' request, there is no guarantee that it will refrain from honoring future requests, nor is it obligated to do so. Moreover, Hankins' recent request suggests that he may likely attempt to make additional, improper distribution requests, and by doing so, will leave empty-handed the last investors to seek a withdrawal.
The complaint charges all the Defendants with violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint further charges Hankins and Tenet with violating Sections 206(1) and 206(2) of the Investment Advisers Act.
The Court granted, among other emergency relief, a temporary restraining order which included the appointment of a temporary receiver over the Convertible Opportunities Fund and Tenet. In its enforcement action, the Commission is seeking additional emergency relief, including orders enjoining the Defendants, preliminarily and permanently, from committing future violations of the foregoing federal securities laws, and a final judgment ordering the Defendants to disgorge ill-gotten gains, and assessing civil penalties.