HEDGE FUND MANAGERS DIVERT INVESTOR FUNDS
The SEC brought another action involving a hedge fund and fraud by its managers. Specifically, the Commission alleged in a complaint filed on Tuesday that Juno Mother Earth Asset Management, LLL, a registered investment adviser, Eugenio Verzili, its chief compliance officer, and Arturo Rodrigues, its portfolio manager and later chief investment officer, essentially looted one of the investor funds they managed. SEC v. Juno Mother Earth Asset Management, LLC (S.D.N.Y. filed March 15, 2011).
Juno, which became a registered investment adviser in November 2007, served as the manager to three hedge funds: Juno Mother Earth Resources, Ltd., Juno Mother Earth Equity Fund, LP and Juno Mother Earth Commodity Fund, LP. This case centers on Resources Fund which was controlled by the individual defendants. That Fund was suppose to invest in equities and commodities which directly or indirectly were involved in the exploration, refinement and distribution of natural resources and renewable and alternative energy. The Fund’s focus was environmental.
Beginning in late 2006 Juno offered investors securities in Resources Fund. Throughout that year and the next the investment adviser raised about $16 million for Resources Fund. Juno however was chronically short of cash.
In 2007 and 2008 defendants Verzili and Rodriguez made 41 withdrawals from the commodity and brokerage accounts of Resources Fund totaling $1.8 million. Approximately $642,000 of these withdrawals were characterized as payment for Fund expenses. PPM however stated that Juno would pay the cost of providing services including overhead. In fact substantial portions of the withdrawals were used to pay operating expenses while other portions were diverted to the personal use of the individual defendants.
Another $1.17 million was withdrawn in return for promissory notes issued by Juno. To effectuate some of these withdrawals from the brokerage and commodity accounts Messrs. Verzili and Rodriguez made written representations that the money was for management and performance fees. In fact those fees had not been earned and the notes were a ruse to take the money from the Fund, according to the complaint.
Finally, the individual defendants made a series of misrepresentations in connection with the operation of the Fund, according to the SEC. In an e-mail to an investor misrepresentations were made regarding the payment of Fund expenses. Another e-mail to an investor claimed the Juno had over $100 million under management when in fact it never had more than $17 million. Misrepresentations were also made regarding the capital investment of the partners and in filings with the SEC in Forms ADV.
By the middle of 2008 substantially of the investors in Resources Fund sought redemption. Juno ceased offering Resources Fund securities. The complaint does not specify if investors were actually able to redeem any portion of their investment.
The complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), (2), (4), 203A and 207. The case is in litigation.