SEC HALTS FRAUDSTER’S EFFORT TO DIVERT SETTLEMENT FUNDS

The SEC obtained an emergency order halting the diversion of settlement payments from the Receiver of the Tom Petter’s Ponzi schemes. The money was intended to compensate defrauded investors of the feeder funds. The man who operated the feeder funds and helped facilitate the Petter’s fraud was poised to obtain the money until the SEC won a freeze order. Absent the order investors would have been paid nothing. SEC v. Quan, Case no. 0:11-cv-00723 (D. MN Filed March 24, 2011).

Defendant Marlon Quan is a hedge fund manager who operated Acorn Capital Group, LLC and Stewardship Investment Advisors, LLC, companies used to manage several hedge funds and both of whom are defendants. From 2001 through 2008 Mr. Quan raised over $459,077,561from at least 165 investors. Those investors and entities invested in Mr. Quan’s hedge funds. During that period Mr. Quan and his entities were paid over $93 million in fees.

From the beginning Mr. Quan’s funds fed millions of dollars of investor money to fraudster Tom Petters. Mr. Petters claimed to operate funds in which investor money was supposedly used to finance the purchase of merchandise for re-sale to “big box” retailers such as Wal-Mart and Costco. In reality Mr. Petters operated a massive Ponzi scheme, the assets of which have been seized by a Court appointed Receiver. During its operation however the Petters funds received millions of dollars from Mr. Quan and his funds in return for promissory notes.

When soliciting funds from investors Mr. Quan furnished them written materials which assured that the big-box retailers were making payments into a lock box which was controlled by one of his entities. He also told investors that a major accounting firm was retained to examine the books of the entities controlled by Mr. Petters, that there was insurance against default and that proper due diligence had been undertaken. These representations were false according to the Commission.

In 2007 when the Petters entities began to default on their notes Mr. Quan and his entities commenced a cover-up, concealing the truth from their investors. Those steps included falsely assuring investors that the Quan funds were in sound financial condition when in fact they were not.

Perhaps the ultimate fraud began as the Receiver for the Petters entites authorized the payment of $14 million which, according to the complaint, “belongs to the investor-victims of the Defendants’ fraud.” Instead, a Quan controlled entity negotiated a deal to obtain control of the funds and distribute them to others, including to Mr. Quan’s attorneys. The fund investors would receive nothing.

The SEC’s complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(4). The emergency order entered by the Court at the request of the SEC froze the settlement funds, preserving the money for the defrauded investors.