Brokerage Founder and Fund Manager Charged With Fraud by SEC

Brokerage Founder and Fund Manager Charged With Fraud by SEC

A management company, its principal, a brokerage firm and its founder were charged with fraud in an administrative proceeding initiated by the Commission. In the Matter of John Thomas Capital Management Group LLC, Adm. Proc. File No. 3-15255 (March 22, 2013). Named as Respondents in the proceeding are: George Jarkesy, Jr., his management company, John Thomas Capital Management Group LLC, Anastasios "Tommy" Belesis, and the brokerage he founded, John Thomas Financial, Inc. The action will be set for hearing.

The Order centers on two key claims. One alleges misrepresentations regarding the value of certain assets held by funds managed by J T Capital. The other focuses on a series of misrepresentations.

Mr. Jarkesy formed JT Capital in 2009. In the same year twin funds were created that were to be managed by JT Capital. John Thomas Financial performed several functions for the management company, including placement agent and investment bank for some bridge loans from the Funds.

By 2011 the two funds had about 120 investors. One fund was valued by Mr. Jarkesy at $18 to $20 million while the other was worth about $10 million. The larger fund claimed to have a return of 24% since inception.

Investors received monthly statements which listed the value of their shares but not the holdings of the two funds. The Funds' limited partnership agreements provided that securities holdings would be priced at market, dealer-supplied prices or by pricing models, although Mr. Jarskey, whose firm earned fees based on certain percentages of profits above 9%, had the discretion to adjust values. Contrary to this representation, internal monthly holding reports for the funds demonstrate that in some instances the values assigned to various securities were arbitrary.

-The securities of one company which made up nearly a third of each Funds' assets were valued in one four month period in 2010 in a range from $3.00 to 10 cents. The values did not pertain to any underlying change in the Company's prospects or financial condition. There was no explanation.

-The values claimed for a second company in late 2010 were the result of a public relations campaign undertaken by Mr. Jarkesy which increased the share price of the stock.

-Two life settlement policies more than doubled in value between February and March 2010. Mr. Jarkesy explained the valuatin came from the auditors. The auditors, however, recommended only a 3% change.

Finally, the offering materials contained misrepresentations. Those materials claimed that JT Capital conducted detailed due diligence before acquiring an asset when in fact it did little. They also represented that KPMG was the outside auditor for one fund when it was not. A similar false allegation was made regarding a second audit firm for the other fund. Likewise, the materials falsely claimed that Deutsche Bank was the prime broker for the funds.

JT Capital and Mr. Jarkesy also misrepresented the nature of their relationship with John Thomas Financial and Mr. Belesis. Mr. Jarkesy was represented to be solely responsible for the funds. JT Capital was expressly represented to be independent of John Thomas Financial. In reality Mr. Belese frequently sought to intervene in the business decisions of the Funds. In some instances he supplanted Mr. Jarkesy as the decision maker for JT Capital. Indeed, Mr. Jaresy "used his role as manager of the Funds to enrich Belese . . . " and John Thomas Financial, channeling significant sums of money to them.

The Order alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4).

For more commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.

For more information about LexisNexis products and solutions connect with us through our corporate site.