The Securities and Exchange Commission has filed an emergency civil action to halt a USD 81m fraud by a group of Palm Beach-based hedge funds.
The SEC’s enforcement
The Securities and Exchange Commission has filed an emergency civil action to halt a USD 81m fraud by a group of Palm Beach-based hedge funds.
The SEC’s enforcement action came days after examiners from the commission’s Miami office began an examination of the defendant-registered broker-dealer. According to the SEC’s complaint, the defendants conducted a fraudulent scheme that has resulted in the loss of most, if not all, of the USD 81 million raised from investors.
The Commission’s complaint names many defendants for their roles in this hedge fund fraud including KL Group LLC, KL Florida, LLC and KL Triangulum Management LLC, for their violations while acting as investment advisers to the hedge fund defendants. In addition, the complaint also names the hedge funds, KL Group Fund LLC, KL Financial Group Florida LLC, KL Financial Group DB Fund LLC, KL Financial Group DC Fund LLC, KL Financial Group IR Fund LLC, and KL Triangulum Group Fund LLC, as defendants.
The complaint also names the principals of the investment advisers and hedge funds – Won Sok Lee (of Singer Island, Florida.), John Kim (of Jupiter, Florida), and Yung Bae Kim (of Irvine, California) – as defendants. Finally, the Commission’s complaint names as a defendant Shoreland Trading LLC, a broker-dealer based in Irvine, California that defendant Lee controlled and that conducted all of the trading for the various hedge funds.
Acting on the commission’s request for emergency relief, Judge Kenneth L Ryskamp of the United States District Court for the Southern District of Florida in West Palm Beach today issued temporary restraining orders, asset freezes and other relief against the defendants. The Court also appointed a receiver over all of the entities named in the Commission’s action.
The Commission’s complaint alleges that beginning as early as 1999 and continuing through February 2005 the hedge funds raised over USD 81 million from at least 250 investors by boasting of consistent above-market returns through trading in aggressive growth stocks. The investment advisers also sent false account statements to investors in at least one of the hedge funds that showed consistently high returns. In contrast to the statements made to investors, the hedge funds were suffering tremendous trading losses. Among other things, the SEC’s complaint alleges that:
* the defendants claimed to have had extraordinary success in obtaining profits for investors. Some offering documents claimed that the hedge funds had achieved annualized returns of 125 per cent to 150 per cent since their inception;
* the defendants used phoney account statements to convince investors that the hedge funds were profitable;
* contrary to defendant’s claims of profitable returns, only about USD 11 million remains of the more than USD 81 million that investors put into the hedge funds; and,
* the investment advisers and the individual defendants earned substantial fees from the hedge funds, in part from a performance commission fee that was typically 20 per cent of the hedge funds’ profit.
David Nelson, director of the commission’s Southeast Regional Office in Miami said: “This fraud was fuelled by brazen lies about the hedge funds’ investment track record. Our priorities now are to hold these defendants accountable and to return as much as we can to defrauded investors.”
In addition to the emergency relief, the commission’s civil action is seeking, among other things, preliminary and permanent injunctions, and an order that the defendants disgorge ill-gotten gains with prejudgment interest and pay civil money penalties.
