In a securities fraud action brought by the Securities and Exchange Commission, the United States District Court for the Southern District of New York held that the undisputed evidence established that a hedge fund and its principal defrauded the fund’s clients by issuing materially false statements concerning the fund’s performance and its assets.
Relying on the statement of facts submitted by the SEC, which was uncontested and which included numerous admissions made by the fund’s principal, the Court found that there was no genuine dispute that the fund deceived its investors by: (i) distributing offering materials that misstated investors’ redemption rights; (ii) issuing quarterly financial statements with fictitious account balances that consistently overstated the fund’s rate of return; (iii) distributing newsletters to potential and existing investors that indicated the fund was performing well when it was incurring significant losses; and (iv) distributing marketing materials that grossly exaggerated the total assets and performance of the fund. In addition, the District Court found that the fund’s principal had admitted that he was in an investment advisory relationship with his clients and that he knowingly distributed the materials containing the misrepresentations.
As a result, the Court granted summary judgment in the SEC’s favor, ruling that the fund and its principal violated Section 10(b) of the Securities Exchange Act, Section 17(a) of the Securities Act, and Section 206 of the Investment Advisers Act. The District Court permanently enjoined defendants from future violations, ordered disgorgement of more than $15.6 million, plus prejudgment interest, and ordered defendants to pay a civil monetary penalty of $15 million. (Securities and Exchange Commission v. Haligiannis, No. 04 Civ. 6488 (RJH), 2007 WL 106174 (S.D.N.Y. Jan. 16, 2007))