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U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 20051 / March 22, 2007

U.S. v. Beacon Rock Capital, LLC and Thomas Gerbasio, Criminal Action No. 07-00142 (E.D. Pa.)

Securities and Exchange Commission v. Gerbasio, Civil Action No. 05 1833 (E.D. Pa.)

Thomas J. Gerbasio and Beacon Rock Capital Criminally Charged for Deceptive Market Timing

First U.S. Criminal Action against a Hedge Fund for Deceptive Market Timing

The Securities and Exchange Commission ("Commission") announced today that Beacon Rock Capital LLC ("Beacon Rock"), a hedge fund located in Portland, Oregon, and Thomas J. Gerbasio ("Gerbasio"), a former securities registered representative with a registered broker-dealer based in Philadelphia, were criminally charged in connection with a scheme to defraud mutual funds and their shareholders of approximately $2.4 million. In an Information filed on March 20, 2007, the U.S. Attorney for the Eastern District of Pennsylvania (the "U.S. Attorney") charged that Beacon Rock and Gerbasio engaged in a scheme to evade and circumvent controls implemented by mutual funds seeking to restrict market timing, or a mutual fund trading strategy generally involving short-term purchases and sales of mutual fund shares. This is the first U.S. criminal case against a hedge fund for deceptive market timing.

According to the Information, from December 1999 through November 2003, Gerbasio, while associated with two brokers registered with the Commission, provided brokerage services to Beacon Rock. The Information charges that the primary purpose of this relationship was to permit Beacon Rock, whose primary trading strategies involved market timing, to evade and circumvent controls implemented by mutual funds seeking to restrict market timing or other excessive trading. In particular, the Information alleges that Beacon Rock and Gerbasio were aware that market timing was unwanted and potentially harmful to mutual fund shareholders, and that the mutual funds would not permit such trades. Nevertheless, Gerbasio and others at his direction, engaged in a number of deceptive and fraudulent practices designed to conceal the identity of Beacon Rock and the nature of its trading activity. The Information charges that Beacon Rock made in excess of 26,000 market timing trades, resulting in approximately $2.4 million in net trading profits; and that Gerbasio earned approximately $215,000 in compensation as a direct result of the illegal trading.

The U.S. Attorney charged Beacon Rock and Gerbasio with securities fraud in violation of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. §78j(b)], and Rule 10b-5 thereunder [17 C.F.R. 240.10b-5].

In the civil injunctive action filed by the Commission on April 21, 2005 against Gerbasio and another defendant, the Commission alleged that from at least August 2002 until October 2003, Gerbasio defrauded hundreds of mutual funds and their shareholders by engaging in deceptive market timing practices for two hedge fund customers, with the result that thousands of market timing trades were placed that would otherwise have been rejected by the fund companies. The civil complaint alleged that Gerbasio employed a variety of deceptions on behalf of the hedge fund customers, including misrepresenting the nature of their trades to the funds, opening dozens of accounts under different names to conceal the customers' identities from the funds, entering trades in amounts designed to avoid the funds' detection triggers, trading in funds less likely to detect the market timing, and advising the customers on strategies to conceal their market timing from funds that objected to and/or prohibited this trading.

On March 30, 2006, the federal district court for the Eastern District of Pennsylvania entered a Final Judgment by consent in the civil action, permanently enjoining Gerbasio from violations of Section 10(b) of the Exchange Act [15 U.S.C. §78j(b)] and Rule 10b-5 thereunder [17 C.F.R. 240.10b-5], and ordering Gerbasio to pay disgorgement together with prejudgment interest in the amount of $540,044, but waiving payment of all but $100,000. The Court did not impose a civil penalty, based on Gerbasio's sworn financial statements submitted to the Commission.

On April 10, 2006, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934, Making Findings, and Imposing Remedial Sanctions barring Gerbasio from association with any broker or dealer. This administrative order was based on the permanent injunction entered in the civil action.

For further information, see Litigation Release Nos. 19647 (April 10, 2006) and 19197 (April 21, 2005); and Release No. 34-51589, Release No. 34-53622 (April 10, 2006).

SEC Complaint in this matter

 

http://www.sec.gov/litigation/litreleases/2007/lr20051.htm


Modified: 03/22/2007