U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20475 / March 4, 2008
Securities and Exchange Commission v. Thompson Consulting, Inc., Case Number 2:08-cv-00171 (Judge Bruce S. Jenkins)(D.Ut. filed March 4, 2008)
Hedge Fund Adviser and Principals Charged in $60 Million Investment Fraud
The Securities and Exchange Commission today announced the filing of an enforcement action against a Salt Lake City investment adviser and three of its principals for making undisclosed subprime and other high-risk investments which resulted in the near total asset losses of two hedge funds managed by the adviser.
The SEC charged Thompson Consulting, Inc., Kyle Thompson, David Condie and Sherman Warner with violations of the antifraud provisions of the securities laws by engaging in much riskier trading strategies than those described to investors, several of whom were seniors. The Commission alleges that Thompson, Condie and Warner managed the hedge funds' investment strategy and also made sales presentations to potential investors in which they emphasized the safety of Thompson Consulting's investment strategy. The Commission's complaint, filed in the United States District Court for the District of Utah, also alleges that Thompson Consulting's deviations from its stated investment policy resulted in substantial losses to both the hedge funds and an individual client. Among those departures from its stated strategy were failed investments in options on the stock of a subprime lender. The complaint further alleges that the defendants improperly transferred money from the hedge funds to the account they managed for the individual client to make up for the individual's losses.
The Commission's complaint alleges that from March through August 2007, Thompson Consulting, in an attempt to attain promised returns of 3% a month, embarked on progressively riskier trading strategies in an attempt to increase returns without disclosing the change in strategy. The Commission alleges that in early March 2007, Thompson Consulting wrote options on the stock of New Century Financial Corp., a subprime lender, for the accounts of the hedge funds, sustaining substantial losses when the price of the underlying stock collapsed later that month. According to the Commission's complaint, the same investment had been made on behalf of one of Thompson Consulting's individual investors. In order to make up for the losses suffered by that investor, Thompson Consulting allegedly transferred $3 million improperly from one of the hedge funds to the individual's account.
In an effort to recoup earlier losses by the hedge funds, the Commission alleges, in July and August 2007, Thompson Consulting invested virtually all the hedge funds' assets in unhedged options on the VIX, the CBOE's volatility index. Virtually all these assets were lost when the securities markets dropped sharply in mid August. According to the Commission's complaint, from July 31 to August 17, 2007, the net asset value of the hedge funds fell from approximately $54 million to approximately $200,000.
The Complaint seeks to enjoin Thompson Consulting, Thompson, Condie and Warner from future violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Sections 206(1) and (2) of the Investment Advisers Act of 1940; payment of disgorgement and prejudgment interest and the imposition of civil penalties. Finally, the Complaint seeks disgorgement from several relief defendants.