Recently, the SEC filed a complaint in federal court in Connecticut charging a pair of hedge fund managers (Messrs. David Bryson and Bart Gutekunst) and their investment advisory firm (New Stream Capital) with lying to the hedge fund’s investors about the fund’s financial condition and other related matters before it failed during the 2008 financial crisis.
According to the SEC’s compliant, New Stream provided investment management services through Messrs. Bryson and Gutekunst to a $750 million hedge fund. In order to appease its largest investor, the hedge fund adviser agreed to give that investor preferential liquidation rights over those of all other fund investors. New Stream was afraid that the large investor would pull its investment out of the fund (estimated to be $300 million of the $750 million total assets of the fund) if it did not agree to the preferential treatment. What New Stream failed to do is inform the other fund investors that it granted the preferential terms to the one investor and the implications to them. In spite of the lack of disclosure, New Stream continued to solicit new investors in the fund. In addition, the fund’s financial statements were falsified to omit the preferential treatment restructuring for the major investor.
Due to the financial crisis in 2008, the fund faced substantial redemptions (in the amount of $545 million) and eventually filed for bankruptcy in 2011. The SEC’s complaint charges the fund managers, along with New Stream’s CFO, who falsified the fund’s audited financial statements, with violations of the “anti-fraud” provisions under federal securities laws, including under the Investment Advisers Act of 1940. The SEC is seeking a variety of sanctions and relief against the defendants, including injunctions, disgorgement of ill-gotten gains with interest, and penalties.
In a parallel action, the U.S. attorney is pursuing criminal charges against the individual defendants.