Hedge Funds

Broker Michael Morrissett Subject to $2,300,000 Unsuitable Hedge Fund Dispute

August 22, 2018 | by Staff Attorney

The securities attorneys at Gana Weinstein LLP are currently investigating Wells Fargo Clearing Services, LLC (Wells Fargo) broker Michael Morrissett (Morrissett). According to BrokerCheck Records kept by the Financial Industry Regulative Authority, Morrissett has been subject to 4 disputes, one of which is still pending. The majority of these concern unsuitable alternative investments.

Most recently, in April 2018, a customer alleged that from 2013 to 2015, Morrissett misrepresented two hedge funds by providing misleading information to the customer about the suitability of the funds, when in fact the hedge funds were unsuitable to the customer’s investment objectives. The customer has requested $2,300,000 in damages. This dispute is currently still pending.

in January 2014, a customer alleged that in 2000, Morrissett placed the customer into an unsuitable investment strategy that made the customer suffer vast losses in the global financial crisis. The case settled for $85,000.

Spruce Alpha Hedge Fund Investors Suffer Massive Losses

November 17, 2015 | by Staff Attorney

According to the New York Times, the Spruce Alpha hedge fund was pitched to investors as providing large returns in periods of market turbulence through the implementation of a complex trading strategy. According to the Spruce Alpha fund, during the 2008 financial crisis investors should have had made gains of more than 600 percent. But what Wall Street pitches in theory almost always goes wrong in practice. Thus when markets turned volatile in August 2015, Spruce Alpha, which had only just started up in April 2014, did not turn the volatility into gains for investors. Instead, the fund turned in one of the worst performances losing 48 percent of their money.

The fund’s holdings at the time were under $100 million and was managed by the $1.5 billion Spruce Investment Advisors. Spruce Investment specializes in managing money for the wealthy and institutional investors. According to the New York Times, half of Spruce Investment’s assets under management come from three family offices, a corporation, and a pension plan. The Spruce Alpha fund was the asset management firm’s first direct hedge fund trading fund that was intended to raise a $500 million portfolio.

After the collapse the Spruce Alpha moved its positions into cash and told investors that they can redeem what remains of their money. The Spruce Alpha tale is only the latest example of how managers market hedge funds and complex investment products to investors that often turn out to be too good to be true. Using back-tested results in hedge fund marketing materials are fantasy recreations with all the benefits of hindsight knowledge that are then advertised as likely future performance. However, back-tested results are derived assuming optimum trading conditions, not what the fund will encounter in real life.

Hedge Fund Canarsie Capital Losses 99.7% of Client’s Money Leading to SEC Investigation

October 10, 2015 | by Staff Attorney

According to news sources, the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) are investigating how the hedge fund Canarsie Capital lost nearly all of the $60 million capital in just three weeks of trading. The fund was run by Owen Li (Li), and Ken deRegt (deRegt). Canarsie Capital was named for the Brooklyn neighborhood where Li grew up and was launched in January 2013 and had offices in midtown Manhattan, New York. Li previously worked for Raj Rajaratnam’s (Rajaratnam) Galleon Group. Rajaratnam is currently serving an 11 year sentence following his May 2011 conviction on nine counts of securities fraud and five counts of conspiracy. The claims against him relate to $63.8 million in illicit profit from 2003 to 2009 by trading in stocks such as eBay Inc, Goldman Sachs Group Inc and Google Inc. Li cofounded the Canarsie Capital with his former Stanford University roommate, Eric deRegt and Eric’s father who ran Morgan Stanley’s fixed-income business.

According to filings the minimum investment accepted from an outside investor in the fund was $1 million. At its peak, Canarsie Capital had managed around $98 million in assets and had some well-known contributors. Goldman Sachs was the fund’s prime broker and clears and settles trades for the hedge fund starting in the fall of 2014. The Goldman Sachs switch came after the fund was dropped in March 2014, by Morgan Stanley’s prime brokerage over concerns with the fund’s risk practices.

On January 20, 2015, Li, wrote an apology letter to investors telling them that he “engaged in a series of aggressive transactions” during the first three weeks of 2015 that resulted in losing all but $200,000 of the fund’s capital, a 99.7% loss. According to the letter, Li engaged in aggressive trading in an attempt to recuperate prior losses the fund suffered in the fund in December 2014. At this time it’s unclear what the trading strategy was that Li engaged in January of this year. The only details in the letter concerning the securities themselves are that they included “options with strike prices pegged to the broader market increasing in value” and “some direct positions.”

BlackGold Opportunity Fund Investors Suffer Losses

May 4, 2015 | by Staff Attorney

The law offices of Gana Weinstein LLP continue to report on investment losses suffered by investors in oil and gas investments that brokerage firms have increasingly recommended to retail investors in recent years. These investments include private placements, master limited partnerships (MLPs), leveraged ETFs, mutual funds, and even individual stocks. See Overconcentrated in Oil and Gas Investments?, MLP Fund MainStay Cushing Royalty Energy Hurt by Failing Oil & Gas Prices; Oil and Gas Investments – Issuers Profit While Investors Take All the Risk

Recently, the according to Bloomberg, BlackGold Capital Management, the energy-focused hedge fund that manages the BlackGold Opportunity Fund LLC and BlackGold Opportunity Offshore Fund LLC (BlackGold Funds) announced that losses in December 2014 were almost triple its initial report after an auditor examined how it valued debt holdings and certain changes were made to the valuation.

According to SEC records, the BlackGold Opportunity Fund was launched in 2009. Since that time the Fund has touted an annualized rate of return of 20% since inception. In 2014, the Fund suffered 12 percent decline compared with a 13 percent loss for oil and gas companies in the Bloomberg high-yield bond index. KKR & Co., which acquired nearly a 25% stake in BlackGold Capital Management reported that BlackGold lost only 6 percent in December originally which was recently revised to 17%. Given the enormous decline already experienced, it is possible that the BlackGold Funds will continue to suffer substantial declines unless the price of oil experiences a tremendous rebound in the near future.

Former Sterne Agee Broker Dean Mustaphalli Alleged to Have Wrongfully Run $6 Million Hedge Fund

July 15, 2014 | by Staff Attorney

The attorneys at Gana Weinstein LLP are investigating claims that former Sterne Agee Financial Services Inc. (Sterne Agee) broker Dean Mustaphalli (Mustaphalli) solicited millions of dollars from investors running to run a $6 million hedge fund on the side without formerly disclosing the activity to his brokerage firm. As reported by InvestmentNews, the Financial Industry Regulatory Authority (FINRA) charged Mustaphalli for founding and receiving commissions from a hedge fund he created called Mustaphalli Capital Partners in or about 2011 without informing his. Mustaphalli sold the investment through his registered investment advisory firm, Mustaphalli Advisory Group.

According to allegations made, Mustaphalli solicited money for the fund from at least 25 investors over six months during 2011. The fund invested in publicly traded equity and debt securities has since declined by approximately 90% according to investors. At least some of Mustaphalli’s clients were direct customers of Sterne Agee as well. According to FINRA, Mustaphalli was not cooperating with the agencies requests to provide account statements for the hedge fund. Typically in these cases if a broker does not cooperate with FINRA’s department of enforcement and the agency proves he withheld information the broker would be barred from the securities industry among other remedies that could be imposed.

Mustaphalli disclosed the existence of the Mustaphalli Advisory to Sterne Agee but did not disclose that he was managing the hedge fund through the firm according to FINRA. However, under the FINRA rules, brokers must fully disclose hedge funds for approval to their member firm and be supervised by the firm under Rule 3040.

ACGM, Inc. Settles Charges with FINRA Concerning Misleading Advertising

September 2, 2013 | by Staff Attorney

HKC Securities, Inc., known as ACGM, Inc. (ACGM), and Harold Kenneth Cohen (Cohen) of Palm Beach, Florida, reached a settlement the Financial Industry Regulatory Authority (FINRA) over the firm’s use of certain hedge fund sales material that allegedly failed to fairly present the risks and potential disadvantages of hedge fund investing. According to FINRA, the sales materials violated FINRA Rule 2210(d) by only highlighting the hedge fund’s positive features, not providing a sound basis for evaluating the investment, containing exaggerated language, failing to identify the basis for factual statements made, and containing an inadequate discussion of the performance of the funds.

The settlement states that between January 2008 and June 2011, the firm marketed hedge funds to large institutional investors such as educational and other endowment funds. The regulator found that ACGM’s procedures for the review and approval of hedge fund institutional sales material were not reasonably designed or implemented to achieve compliance with FINRA’s content standards for institutional sales material and were not appropriate for a business actively engaged in the third-party marketing of hedge funds. Cohen was the firm’s Chief Compliance Officer and the principal responsible for the review and approval of institutional sales material. The complaint alleges that Cohen failed to adequately supervise the review of sales materials in order to achieve compliance with FINRA’s content standards.

The settlement provided some examples of the alleged misleading and exaggerated content provided to investors. One example referred to a fund as having “significantly outperformed its benchmarks” or a fund’s performance as “remarkable.” Another summary document referred to the performance of the underlying fund managers for a fund of funds over 1-year, 3-year, and 5- year time horizons, even though the fund of funds had only been in operation for approximately three months at the time of the document. Other documents failed to identify the basis for factual statements made and only described the fund as the “#l hedge fund in Israel” and describing another fund as the “#l performing equity market neutral fund in the world in 2005.”

Two JP Morgan Traders charged with Overvaluing Investments

August 15, 2013 | by Staff Attorney

On August 14, 2013, the Securities & Exchange Commission issued a press release explaining that it had charged two JPMorgan traders with attempting to conceal investor losses by overvaluing the investments in a portfolio that they managed. The traders were Javier MarBecause of the overvalued investments, JPMorgan’s first quarter income before income tax expense was overstated by $660 million because of the alleged misconduct.

From the SEC:

The SEC alleges that Javier Martin-Artajo and Julien Grout were required to mark the portfolio’s investments at fair value in accordance with U.S. generally accepted accounting principles and JPMorgan’s internal accounting policy. But when the portfolio began experiencing mounting losses in early 2012, Martin-Artajo and Grout schemed to deliberately mismark hundreds of positions by maximizing their value instead of marking them at the mid-market prices that would reveal the losses. Their mismarking scheme caused JPMorgan’s reported first quarter income before income tax expense to be overstated by $660 million…