NEW YORK — Revealing the perils of investing in the secretive world of hedge funds, Massachusetts securities regulators Wednesday charged a Boston brokerage firm with failing to supervise twobrokers who allegedly duped unsophisticated investors into buying shares of risky hedge funds that wiped out some of their retirement nest eggs.
Massachusetts Secretary of State William Galvin charged Cantella Securities with failing to uphold their fiduciary responsibility to investors and failing to keep proper records associated with the unregistered hedge funds.
The funds, Hercules Hedgehog fund and Agrippa fund, imploded after losing bets on technology stocks, costing 41 investors an estimated $3.5 million.
Galvin said he is seeking to return all the lost money to duped investors, which include a UPS driver, an electrician and a retired Coast Guard officer. One client allegedly lost his entire $100,000 investment.
The scam, which dates to 1999 and was addressed by Galvin in August when he filed a complaint against the two brokers, highlights the dangers associated with hedge funds, which are unregistered, privately managed pools of capital.
Galvin says the positive buzz associated with hedge funds’ strong performance in the three-year stock swoon and their reputation as investments for the wealthy are luring unsuspecting investors.
”Investors are hearing that hedge funds are hot, but they’re not hearing that there is tremendous risk,” Galvin says. ”It’s like being on a high wire without a net. There is a potential to lose all your money.”
The fact that these two hedge funds were ever born shows how dangerous the funds can be for average investors. Cantella executives approved the funds’ formation even though James Pangione and Timothy Rassias, the brokers-turned-hedge-fund-gurus, had little, if any, experience managing money, the complaint says.
In an Aug. 13 complaint against the brokers, Rassias told prosecutors he decided to get into hedge funds because others, such as famed manager George Soros, were getting rich running similar funds.
”We saw Jeff Vinik from Fidelity go out and open his own hedge fund,” Rassias noted.
Despite running what turned out to be a risky tech fund, neither Pangione nor Rassias had any formal tech training or background. Rassias was an arts and science major.
Ironically, both funds’ offering memoranda, or prospectuses, failed to mention the funds would focus specifically on tech stocks or would employ a day-trading strategy, the complaint says. However, testimony by Pangione confirmed that such strategies were used.
The risky strategies cost investors such as Riccardo Lonardo, 74, a retired Coast Guard officer, dearly. ”Mr. Pangione was very suave and persuasive,” he says. ”He said he was gonna treat me like family.”
The ”no-risk” investment touted by Pangione resulted in a loss of $325,000 for Lonardo. He had $10 left in his account.
Attorneys for Cantella, Pangione and Rassias didn’t return calls Wednesday for comment.
