Federal regulators continue to put pressure on hedge funds. In March alone, the Securities and Exchange Commission has already brought civil cases against at least four hedge fund managers or firms. In addition, the CME Group, which oversees the futures markets, fined a hedge fund for violating its rules regarding position limits.
Altogether this year, regulators have brought at least nine enforcement cases against hedge funds, including eight by the SEC. The Department of Justice also has brought at least two fresh criminal cases against hedge funds this year.
In addition to Federal regulators — as we recently chronicled — former Citadel Investment Group tech expert Mikhail Malyshev, was indicted by the Cook County (Ill.) Sheriff on two counts of perjury stemming from a dispute over the possible theft of critical company secrets, proprietary computer code.
In all of 2010, the SEC appears to have brought just five individual cases against hedge funds. Yet, just one of the cases brought this month has received widespread coverage, and that’s because it involved a major figure. The SEC filed insider trading charges against Rajat K. Gupta, who has served on the boards of directors at Goldman Sachs and Procter & Gamble, alleging he illegally tipped Raj Rajaratnam with information about the quarterly earnings at both firms as well as Berkshire Hathaway’s $5 billion investment in Goldman.
However, just this past week the SEC accused Juno Mother Earth Asset Management LLC, a hedge fund investment advisory firm and its two founders — Eugenio Verzili and Arturo Rodriguez — with misappropriating client assets, inflating assets under management by about $40 million, and filing false information with the SEC. The regulator alleges that Juno, Verzili and Rodriguez “looted” about $1.8 million of assets from their hedge fund and misusing it to pay Juno’s operating costs related to payroll, rent, travel, meals, and entertainment. They were also accused of issuing promissory notes to conceal a substantial portion of their misappropriation.The SEC also says Juno, Verzili and Rodriguez claimed Juno investors had invested millions of dollars when they actually had invested nothing in the funds.
Last week, CME Group, which operates the New York Mercantile Exchange, fined hedge fund Goldfinch Capital Management LP $50,000 for violating position limit rules for trading natural gas. This was the third time Goldfinch faced similar accusations in two years. The CME said Goldfinch’s net short position was 5.3 percent larger than speculative investors are permitted under certain circumstances.
No wonder hedge funds continue to boost their compliance departments.
