The Securities and Exchange Commission ("SEC") filed civil charges against a Minnesota hedge fund and two employees, alleging that they facilitated the $3.65 billion Ponzi scheme orchestrated by Thomas Petters by funneling $600 million in customer funds and subsequently attempting to cover up problems that later resulted in the scheme's unraveling. Petters' scheme was one of the largest in history and later landed him a fifty-year sentence in federal prison. The SEC charged Arrowhead Capital Management LLC ("Arrowhead"), along with founder James N. Fry ("Fry") and director Michelle W. Palm ("Palm") (collectively, "Defendants") with numerous violations of the Securities Act of 1933 and the Securities Exchange Act of 1934. Fry and Palm also face charges of aiding and abetting violations of the Investment Advisers Act of 1940.
According to the complaint, Arrowhead sold interests in three Arrowhead-branded hedge funds (the "Funds") from 1998 through 2008 through the use of confidential private placement memoranda and pitch books. These documents included false representations that Arrowhead was registered with the SEC as an investment adviser, when in fact its registration had been terminated in 1997. In the course of selling interests in the Funds, the Defendants made numerous misrepresentations to investors, including material facts about the security of their interests. Additionally, as the scheme began to encounter financial stress, the Defendants concealed Petters' inability to make payments on some notes, even going so far as to extend the maturity date of the notes to hide the default risk. In total, over $600 million was raised through the Fund offerings, and nearly all investor contributions were then invested in the scheme. During that same period, the Defendants earned more than $42 million in fees.
The SEC is seeking relief against the Defendants including the entry of a permanent injunction, disgorgement of ill-gotten gains, pre-judgment interest, and civil monetary penalties. Earlier this year, Palm pled guilty to one count of securities fraud and one count of providing false statements to a government agent.
A copy of the SEC Complaint is here.