The SEC brought an enforcement action against a Salt Lake City investment adviser and three of its principals for making undisclosed high-risk investments that resulted in the near total loss of the assets in two hedge funds managed by the adviser. The SEC charged Thompson Consulting, Inc., Kyle Thompson, David Condie and Sherman Warner with violations of the antifraud provisions of the securities laws by engaging in much riskier trading strategies than those described to investors, several of whom were seniors.
The SEC's complaint alleges that from March through August 2007, Thompson Consulting, in attempting to attain promised returns of 3 percent per month (or more than 36 percent per year), embarked on progressively riskier trading strategies without disclosing the change in strategy to the hedge funds' investors. The SEC alleged that in early March 2007, Thompson Consulting wrote options on the stock of New Century Financial Corp., a subprime lender, for the accounts of the hedge funds, sustaining substantial losses when the price of the underlying stock collapsed later that month.
The SEC further alleged that Thompson Consulting had made the same investments on behalf of one of its individual clients. To make up for the losses suffered by that individual, Thompson Consulting improperly transferred $3 million from one of the hedge funds to the individual's account.
In an effort to recoup earlier losses by the hedge funds, the SEC stated that Thompson Consulting invested virtually all the hedge funds' assets in unhedged options on the VIX, the CBOE's volatility index, in July and August 2007. Virtually all of the hedge funds' assets were wiped out when the securities markets dropped sharply in mid-August. According to the SEC's complaint, from July 31 to August 17, 2007, the net asset value of the hedge funds fell from approximately $54 million to approximately $200,000.
Please click http://sec.gov/news/press/2008/2008-28.htm for a copy of the administrative order.