Feb. 12–The state banking commissioner has charged a Greenwich hedge fund firm and its partners with defrauding customers.
Commissioner John P. Burke accused Criterion Investment Capital LP and its partners of violating a section of the Connecticut Uniform Securities Act, which prohibits misleading statements when offering or selling securities, said Jim Heckman, spokesman for the Connecticut Department of Banking.
Last week, Burke issued three cease-and-desist orders in the matter. One of them alleges that partners Eddie Papic of Darien and Wilder Douglas Carnes of Newtown violated Connecticut securities law by not telling prospective investors that Criterion Investment Capital was selling hedge fund interests of less than $500,000 to non-accredited investors.
Another order accuses Criterion Investment Capital of misrepresenting the performance of its Criterion Investment Fund I, failing to disclose past bankruptcies of Papic and Carnes, of doing business as an unregistered investment adviser and of employing Papic and Carnes as unregistered investment adviser agents.
Heckman said Criterion may be subject to a maximum fine of $130,000. However, the firm may no longer exist.
Reached on a wireless phone, Carnes declined to comment on the allegations.
Criterion Investment Capital did not answer its office telephone yesterday.
Papic would not comment on the record.
Criterion Investment Capital can ask the department for a hearing in writing within 14 days after it receives the commissioner’s cease-and-desist orders, according to the banking department. A department employee said the company has not yet requested a hearing.
Defendants can present evidence, rebuttal evidence and other arguments related to its case, according to the banking department’s rules. If a defendant does not attend the hearing, the banking commissioner can impose the maximum fine, according to the banking department. The commissioner also accused Papic and Carnes of not disclosing that the firm’s average hedge fund investment was 19 days in duration, though its prospectus said the objective was to achieve long-term capital appreciation. Heckman said Criterion can continue to operate while its fraud case is pending.
The alleged fraud occurred from January 2001 to January 2002, according to the banking department.
One investor reported the alleged fraud and it affected about 15 clients, Heckman said. Between $1.7 million and $1.8 million worth of investors’ money was involved in the questionable activity, he said. Heckman said the state banking department does not track the number of questionable hedge fund practices brought to its attention. Among other cases, Banking Commissioner Burke in November barred James Gardner of Darien from the securities business for five years after he sold unregistered securities.
In October, Burke fined RLR Capital Management Inc. of New Canaan $6,200 for unregistered investment advisory activity. The company later became registered as an investment adviser, the banking department said. Burke fined New York City-based MMC Securities Corp. $500 in December for selling securities from a Norwalk branch office that was not registered with the state banking department.
Despite those cases, one Fairfield County hedge fund executive said devious practices among fund operators are most likely rare. “The incidence of fraud in hedge funds is no greater than it is in a lot of other businesses and may be less,” said Robert Jaeger, chief investment officer of Norwalk-based Evaluation Associates Capital Markets and author of “All About Hedge Funds: The Easy Way to Get Started” (McGraw-Hill). He suggested that investors use caution to guard their assets from questionable hedge fund operators.
“In some of these fradulent cases, an alert and careful investor might well have been reluctant to make the investment in the first place,” Jaeger said.
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