SEC Tags Investment Advisers in Fund Misuse

Jack Humphrey, Regulatory journalist
December 22, 2010 /

Three former investment advisers who held top positions in two San Francisco-based firms, American Pegasus LDG and American Pegasus Investment Management, got the ire of the Securities and Exchange Commission (SEC) for failing to disclose conflict of interest when they misused the $100 million hedge fund from the subprime automobile loans of the investors.

The SEC charges American Pegasus Auto Loan Fund former CEO Benjamin Chui and former portfolio manager Triffany Mok, and former general counsel Charles Hall, Jr with fraudulent misuse of fund assets of subprime loan hedge fund.

According to SEC, in mid-2007 the investment advisers used the investors’ funds worth $18 million in loans and advances in a sinister financial network for their personal gains and tried to hide the misconduct “by inflating the value of fund assets.” Chui had also used millions of borrowed cash for his own hedge funds, the SEC stated in its complaint, adding that it fomented a conflict of interest as the investment advisers needed to strengthen the performance of funds while propping up their own loan supplier.

The SEC found then that this undocumented use of borrowed cash as payments, which was reflected in 2008 as the investment advisers’ business loans accounting for 40 percent of Auto Loan Fund’s assets, was charged on investors who were not aware of the transaction.

The lawsuit claims that the investment advisers sold assets to the fund at 300 percent mark-up and in February 2009 acquired a $12 million auto loan portfolio which they resold right after for $38 million to wipe out the amount owed to the fund, concealing the illegal transaction.

The SEC will disgorge the investment adviser firms of the “improper” $850, 000 management fees. Additionally, the three investment advisers will be penalized with fines amounting to more than $1 million and will be barred from practicing their profession for several years.

 

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