Special from Jay Gould
SAN FRANCISCO, CA (HEDGECO.NET) – On August 23, 2004, the U.S. Securities and Exchange Commission (the “SEC”) filed an emergency action in U.S. District Court in Wichita, Kansas against a Wichita-based hedge fund and its unregistered investment adviser, TrueHedge Advisors, L.L.C. (“TrueHedge Advisors”), alleging that the hedge fund adviser fraudulently promoted the hedge fund by lying to investors and then spent their money on his personal expenses, including the construction of his new private residence in Wichita. The SEC simultaneously filed in the civil action, and the court granted, a motion seeking an asset freeze and other emergency relief against the defendants, in order to prevent the dissipation or concealment of assets. On July 20, 2004, the SEC released for public comment a set of proposed rules and rule amendments that would require many advisers of hedge funds to register under the Investment Advisers Act with the SEC. The comment period on the proposed rule is set to close on September 15, 2004, although the Managed Funds Association has requested that the comment period be extended to October 28, 2004. In the proposing release,the SEC cited the growing number of fraudulent hedge fund schemes as one of the rationales for requiring hedge fund adviser registration.
In the TrueHedge Advisors complaint, the SEC alleged that Scott B. Kaye, of Wichita, as the sole managing member of the unregistered investment adviser of TrueHedge Capital Partners, L.P. (“TrueHedge Capital”), a hedge fund based in Wichita, raised $1.9 million for TrueHedge Capital by selling limited partnership interests to 18 investors from June 2002 through February 2003. The SEC further alleged that, whereas the private placement memorandum claimed TrueHedge Advisors and Kaye would use the funds to operate a hedge fund, investing in stocks and options, Kaye misappropriated more than a third of the offering proceeds. The SEC charged Kaye, TrueHedge Advisors, and TrueHedge Capital Partners with violating various anti-fraud provisions of the Federal securities laws and is seeking permanent injunctions, an order requiring the defendants to disgorge any illicit profits from their fraudulent scheme, plus prejudgment interest, and civil money penalties.
Under the proposed hedge fund adviser registration rule, TrueHedge Advisors would not have been required to register with the SEC because it did not have $30 million under management. One of the issues on which the SEC requested comment in the proposing release is whether the dollar amount under management by advisers pursuant to which SEC registration would be required should be reduced, thereby requiring more and smaller investment advisers to register. This recent SEC enforcement action could be viewed as the SEC building its case for a more expansive registration requirement.
White & Case LLP represents hedge fund sponsors and advisers, prime brokers, and administrators through its 38 offices in 25 countries around the world.� For further information on the White & Case hedge fund practice, contact:
Jay B. Gould, Esq.
White & Case LLP
San Francisco, California�� 94111
415-544-1112 (O)
310-800-6500 (C)
[email protected]
