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The Securities and Exchange Commission
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,
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.
For more news and analysis of Ponzi schemes, visit
Ponzitracker, a blog by Jordan Maglich, an attorney at Wiand Guerra King P.L.
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