U.S. SECURITITES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
SEC INSTITUTES PROCEEDINGS AGAINST TWO FOLLOWING HEDGE FUND COLLAPSE
The Commission has instituted administrative proceedings against two Bay Area men following the collapse of a $1 million hedge fund. In an administrative order ("Order") filed today, the Division of Enforcement alleges that a former principal of San Francisco investment advisory firm Morgan Fuller Capital Management ("Morgan Fuller") caused the hedge fund's collapse through a scam stock sale, and alleged that a former Morgan Fuller employee issued newsletters that falsely concealed the fund's collapse from investors.
Named in the Commission's Order are former Morgan Fuller co-owner Alexander Lushtak, 35, of San Francisco and former Morgan Fuller fund manager Charles Seavey, 34, of Oakland. According to the staff's allegations, beginning in early 1997, Morgan Fuller acted as investment adviser to Paradigm Capital Fund ("Paradigm" or the "Fund"), a hedge fund with initial investments of just under one million dollars. Seavey was the Morgan Fuller employee responsible for managing Paradigm's investments. However, the staff alleges, Seavey's trading strategy proved disastrous: in one week in February 1997 alone, Paradigm lost over half its value.
Shortly thereafter, the staff alleges, Lushtak offered to help Paradigm recoup its losses by arranging for an acquaintance to sell stock in a foreign bank to Paradigm at a substantial discount to market value. In fact, the staff alleges, after personally pocketing $240,000 Paradigm paid for the stock - nearly all of Paradigm's remaining assets - Lushtak instead sold the stock to a third party. Paradigm never received the stock and the Fund collapsed a few months later.
The staff further alleges in the Order that Seavey sent quarterly reports to Paradigm's investors in April and July 1997 that falsely concealed the Fund's precarious financial condition. In the reports, Seavey represented that Paradigm had realized a positive return of 6% in the first quarter and a loss of 4% in the second quarter of 1997. However, these calculations included the market value of the stock that Lushtak never delivered to Paradigm. In fact, the Fund had suffered substantial trading losses and lost nearly its entire value.
According to the staff's allegations, Lushtak and Seavey willfully aided and abetted and caused Morgan Fuller's violations of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The staff further alleges that Lushtak violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. A hearing will be scheduled before an administrative law judge to determine whether the allegations contained in the order are true and, if so, what remedial actions or sanctions are appropriate.
In related actions, in October 1999 the Commission issued administrative orders against two other Morgan Fuller co-owners for their roles in this scheme. James Fuller and Gordon Taubenheim were censured and ordered to cease and desist from violations of the antifraud provisions of the Investment Advisers Act of 1940. In addition, Fuller was suspended from association with any investment adviser for 9 months and fined $15,000; Taubenheim was suspended from association with any investment adviser for 6 months and fined $10,000. The two agreed to issuance of the orders without admitting or denying the Commission's findings. See In The Matter of James William Fuller, Investment Advisors Act Rel. No. 1842 (Oct. 4, 1999); In The Matter of Gordon Richard Taubenheim, Investment Advisors Act Rel. No. 1843 (Oct. 4, 1999).