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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