$98.6m Fines Entered Against Hedge Fund Adviser

Jack Humphrey, Regulatory journalist
April 02, 2012 /

United States District Judge Robert W. Sweet of the Southern District of New York has finally ruled in favor of the U.S. Securities and Exchange Commission in a late trading scheme involving a UK hedge fund manager. The ruling orders total monetary relief of $98.6 million.

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 $60,204,423.20, representing $38,416,500 in disgorgement of their ill-gotten gains and $21,787,923.20 in prejudgment interest. Finally, the final judgment imposes a civil money penalty of $38,416,500, on a joint and several basis, against PCM and Chester.

Previously, on February 15, 2012, the Court issued an Opinion finding that the defendants “intentionally, and egregiously,” violated the antifraud 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 p.m. ET), but receiving the price based on the net asset value already determined as of 4:00 p.m.

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, “[PCM and Chester] 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.


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