A US court has entered a permanent injunction against Cornerstone Capital Management, a New York-based hedge fund operator, and its chief executive, the inaptly-named Joseph Profit of Atlanta, Georgia, for defrauding hedge fund participants and reporting violations.
The order stems from a complaint filed by the Commodity Futures Trading Commission last January charging that Profit and Cornerstone, a registered commodity pool operator and commodity trading adviser, defrauded participants in the Cornerstone Capital Management Icon Fund, a purported hedge fund.
The order found that Profit and Cornerstone liable for defrauding actual and prospective clients and Icon Fund participants by misrepresenting the rates of return Cornerstone generated and the value of assets it managed in the Icon fund. The firm also failed to file annual reports.
The ruling also found that Profit falsely claimed the Icon fund had generated exceptional annual returns of 42.18 per cent in 2005 and 20.74 per cent in 2006. In fact, the fund was never profitable and Profit lost more than USD1m through trading losses and personal expenditure on items such as meals, golfing fees, airline tickets and accommodation.
While the Icon fund received no more than USD3.2m in assets from investors, Profit claimed to a potential client that Cornerstone had USD50m in assets under management. He and the firm reported to various databases and hedge fund information providers that Cornerstone had assets under management ranging between USD20m and USD60m.
The court ruled that Profit prepared and delivered to at least one investor a bogus audited financial statement for the Icon Fund, which indicated that the hedge fund had net assets of USD14.81m at the end of December 2005, and had delivered returns exceeding 20 per cent between October 2004 and the end of 2005.
Profit was ruled to have wilfully concealed material information from the National Futures Association and failed to submit to the NFA a required 2005 annual report for the Icon Fund. Sanctions include permanent injunction and penalties, which will be determined later.
The order permanently enjoins Cornerstone and Profit from further violations as charged and requires them to pay restitution and a civil financial penalty, which will be determined after the winding up of the court-appointed receivership in the case.