US SEC charges ex-hedge fund managers for funds misuse

The U.S. Securities and Exchange Commission (SEC) ordered two San Francisco-based hedge funds and three former employees to pay $1.2 million for multiple antifraud violations.

American Pegasus Auto Loan Fund former CEO Benjamin P. Chui together with former portfolio manager Triffany Mok and former general counsel Charles E. Hall, Jr. were found by the SEC to have engaged in “improper self-dealing, misused client assets, and failed to disclose conflicts of interest.”

Without admitting or denying the charges, the respondents agreed to the settlement terms laid down by the SEC. For Chui, these mean penalties amounting to $175,000 and being barred from associating with an investment adviser for five years. Hall will pay $100,000 penalty and, apart from being restrained from the same associations as Chui, will also not be allowed to appear or practice as an attorney before the SEC for three years. Mok agreed to pay $75,000 penalty and to also be restrained from associating with an investment banker. The two adviser firms involved, American Pegasus LDG and American Pegasus Investment Management, agreed repayment of management fees totalling $850,000 back to the funds.

In its statement, SEC said there was “pervasive conflict of interest” when in 2007, the respondents used more than $18 million from the Auto Loan fund to acquire the fund’s only source of auto loans. Chui also borrowed millions from the fund to “prop up other hedge funds he managed.”

The SEC also found that by late 2008, fund investors were charged for fees which were unknown to them associated with around 40 per cent of Auto Loan Fund “loans” made for the related businesses of the fund managers themselves. Such debts were then essentially erased from the books when Chui, Hall, and Mok sold assets at 300 per cent mark-up.

SEC San Francisco Regional Director Marc Fagel said, “Fund advisers have a duty to disclose conflicts of interest and act in the best interests of clients whose assets they are entrusted to manage.

“Instead, Chui, Hall, and Mok created a tangled financial web, using investor funds for their personal benefit and then attempting to paper over the misconduct by inflating the value of fund assets.”