SEC Focuses on Efforts by Hedge Fund Managers to Conceal Poor Performance
Caryn Mazin Schechtman; Perrie M. Weiner, 02 November 2008
The SEC has charged a San Francisco investment adviser, MedCap Management and Research LLC (MMR), and its principal, Charles Toney, Jr., with falsely inflating the price of a thinly-traded portfolio security to enhance fund asset values at the end of a reporting period so that it could avoid reporting a 40 percent loss and stave off a rash of investor redemptions. This practice, which the SEC calls “portfolio pumping,” is alleged by the SEC to violate the antifraud provisions of the Investment Advisers Act of 1940. The charges were filed October 16.
MedCap Partners L.P. (MedCap), a fund managed by Toney and MMR, was plagued by poor performance and investor redemptions in 2006. According to the SEC, facing mounting losses in the third quarter of the year, Toney and MMR allegedly placed numerous buy orders during the last few days of the quarter in a thinly traded over-the-counter security heavily owned by MedCap through another MMR-controlled fund. The SEC alleges that this purchasing activity caused the portfolio security to quadruple and fraudulently increased MedCap’s value for the third quarter of 2006 by $29 million; both the stock price of the underlying security and MedCap’s value subsequently declined back to their previous levels.
Without admitting or denying the SEC’s allegations, Toney and MMR agreed to:
cease and desist from violating the antifraud provisions of the Investment Advisers Act of 1940; disgorge the additional management fees MMR received as a result of MedCap’s inflated value and interest in the amount of $70,633.69; and receive a Commission censure.
In addition, Toney consented to a bar from association with an investment adviser, with the right to reapply after one year, and he has agreed to pay a $100,000 penalty.
