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The Case of the First Unregistered Hedge Fund Advisor Prosecution

The general activities in the hedge fund field have been under the close supervision of the SEC due to the many misuses on the part of several advisors. A recent case triggered about unregistered investment advisor who has failed to provide the sufficient supervision over the hedge fund, called for the increased caution on the part of the SEC.

The first case against unregistered investment advisor was brought to the media attention in December 2003. Before this there have been many cases about failure to supervise the doings of registered investment advisors. In the first case of the unregistered investment supervisor, charges concerning fraudulent actions have been made by the Commission.

The actual case

The main "heroes" in the case are Robert T.Littell and Wilfred Meckel. The first one is the director of investments of Marque Millennium Group, INC (MMG), whereas the latter is the principal. The company which was used in the fraudulent schemes offered the following hedge funds: Marque Partners I (MPI), Marque Partners II and Marque Fund II Limited.

Generally, Littell was under the direct supervision of Meckel. The first was accused of fraudulent attraction of the investors to the offered hedge funds, whereas Meckel was accused of not providing the sufficient and required by law supervision. The interesting thing is neither of them did refute the accusations made during the hearings. They kept neutral tone with regards of their guilt neither accepting nor refuting it.

The SEC has committed to the closest and detailed supervision of the activities of securities companies, without ignoring the activities of the hedge funds. SEC representatives claim that they will do their best to make hedge fund employees work in the best interests of their clients.

The commission states that no difference will be made on registered and unregistered advisors regarding the appropriate management and guarding of the interests of the clients of the hedge funds. Every statement of the fund employees should be soundly supported by firm verifications. Failure to do so will be regarded as a lack of adequate supervision.

Some of the techniques used by Littell to defraud potential investors and hedge fund investors include:

  • Falsification of the exact structure of the management style used by the hedge funds, as well as withholding of the auditor, accountant and risk management mechanisms.
  • Misrepresentation of the statistics regarding the performance of the particular hedge funds
  • Disregarding the significant losses incurred by the hedge funds and still redeeming full amounts of investments by two large investors.
  • Concealing the losses of the hedge funds and disregarding the right of both the hedge fund investors and Meckel to know about such losses.

Meckel's ignorance regarding the activities of Littell stemmed from the fact that he completely relied on the reporting of Littell without making further verifications. He failed to undertake such actions as regards adequate supervision as:

  1. keeping accurate and periodic record of the investment in the hedge funds and the corresponding distributions
  2. adequate evaluation of the current position of the hedge fund
  3. adequate and prompt revision of the trading activity of the hedge funds each day
  4. hedge funds' back office and trading functions separation

The ignorance on the part of Meckel resulted in the delay of the finding of the misdoings of Littell.

Littell's Verdict

The SEC prohibited Littell to participate as an investment advisor in whatsoever hedge funds. He was additionally penalized with $15,000 fee for violating many of SEC's laws.

Meckel's Verdict

Meckel was suspended from participation in whatsoever supervisory positions for the next six months. He was also sharply censured by the SEC.

The verdicts in terms of financial sanctions that were announced by the SEC were influenced by the remedial acts undertaken by Meckel, which approximated $600,000 in terms of compensations for the incurred losses by the hedge fund investors. Additionally, Littell has submitted financial statements, which significantly influenced SEC's sanctions.

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