Hedge Fund Managers Charged With Defrauding Investors

Eliane Chavagnon

4 October 2012

The Securities and Exchange Commission has individually charged a pair of hedge fund managers and their firms for deceiving investors with regards to how they were handling money invested in their respective hedge funds.

San Francisco, CA-based Hausmann-Alain Banet and his firm Lion Capital Management allegedly stole over $500,000 from a retired schoolteacher who thought she was investing her savings into Banet’s hedge fund, according to an SEC statement on its website.

According to the SEC's complaint filed in federal court in San Francisco, Banet led the teacher to believe that his hedge fund would invest in the stockmarket using a long/short equity investing strategy. Rather, he used the investment to fund unauthorized personal and business expenses.

Meanwhile, the authority charged Chicago-based Norman Goldstein and Laurie Gatherum, and their firm GEI Financial Services, for fraudulently extracting at least $147,000 in excessive fees and capital withdrawals from a hedge fund they managed.

According to the SEC’s complaint against Goldstein, Gatherum, and GEI Financial Services - filed in federal court in Chicago - investors in the hedge fund were not informed that its advisor had removed "various performance hurdles" when calculating fees.

It is alleged that Goldstein, Gatherum and their firm failed to tell their advisory clients that Illinois regulators had stripped Goldstein of his securities registrations in 2011. "But even after losing his registration status, Goldstein continued to make all investment decisions on behalf of clients, and he and Gatherum caused GEI Financial Services to violate compliance rules applicable to SEC-registered investment advisors," the SEC said.

“These hedge fund frauds have lured even the most sophisticated investors using the siren song of outsized returns or secured and guaranteed investments,” said Robert Khuzami, director of the SEC’s division of enforcement.

In its statement, the SEC highlighted that since 2010 it has filed over 100 cases involving hedge fund malfeasance such as for misusing investor assets, lying about investment strategy or performance, charging excessive fees or hiding conflicts of interest.

“The most serious hedge fund frauds involve advisors who play fast and loose with investor money,” added Bruce Karpati, chief of the SEC enforcement division’s asset management unit. “Investors can complement the SEC’s vigilant enforcement against hedge fund misconduct by becoming increasingly wary of hedge fund managers who boast extreme performance measures and asking well-informed questions about investment strategy, fees, and potential conflicts of interest.”