Thursday, March 28, 2013

Hedge Fund Hoax

Though created to “hedge against risk” and maximize gains through aggressive and advanced investment strategies, one recent hedge fund lawsuit against a prominent investment company may undermine confidence in this fundamental function of hedge funds. In September of last year, the Securities and Exchange Commission brought formal charges against Walter V. Gerasimowicz, Meditron Management Group, LLC (MMG) and Meditron Asset Management, LLC (MAM), for misusing client hedge fund assets from September 2009 through September 2011. 

Gerasimowicz, a well established and highly successful New York City investment strategist, is the owner of both MMG and MAM. The SEC’s charges against the three respondents allege all parties played a role in siphoning millions of dollars from their hedge fund client, Meditron Fundamental Value/Growth Fund, LLC. In its Order, the SEC alleges the money was used to keep Gerasimowicz’s failing contracting company, SMC Electrical Contracting, afloat as it dealt with bankruptcy proceedings. Nearly 80% of Meditron Fund’s assets were transferred to SMC over a two year period, in disregard of their client’s investment interests. Gerasimowicz and MAM maintained their claims that MAM held a diversified portfolio and allegedly withheld information regarding their investment deviations, even though these deviations contradicted their stated investment strategies. 

 Over the two year period of the respondents’ alleged shenanigans, Gerasimowicz sent Meditron Fund investors quarterly statements that neglected to show the company’s “investment” in SMC. Furthermore, the Investment Advisers Act of 1940 requires financial statements relating to client funds to be prepared and audited in accord with GAAP, by a PCAOB approved public accountant. Financial statements were prepared by Gerasimowicz, not a public accountant, before being dispersed to clients and audited statements were subject to lengthy, year long delays before completion.

Additionally, the respondents allegedly recruited new MAM and MMG investors and misled current clients by misrepresenting MAM’s assets at $1.1 billion. Though the respondents claimed they were working to minimize risk, their payments to SMC did anything but. The SEC found that third party investors with full knowledge of SMC’s situation were hesitant to invest in the company and could not be maintained unless Gerasimowicz himself personally guaranteed repayment of their financing. The SEC’s Order also alleges that the respondents neglected to perform any valuation analysis of their “investment” of Meditron Fund’s assets in SMC. 

Gerasimowicz, Meditron Management Group, and Meditron Asset Management are alleged to have violated various sections of the Securities Act of 1933, the Securities and Exchange Act of 1934, and the Investment Advisers Act of 1940. The judge on this matter is set to issue an opinion no later than 300 days from the Order’s date of service.

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