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U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 20567 / May 12, 2008

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 Sentenced in Criminal Action Charging Deceptive Market Timing

Resolves 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 registered representative with a registered broker-dealer based in Philadelphia, have been sentenced in connection with the first U.S. criminal case brought against a hedge fund for deceptive market timing. On May 7, 2008, Judge Eduardo C. Robreno of the United States District Court for the Eastern District of Pennsylvania, sentenced Gerbasio to one year and one day in prison, two years of supervised release, and ordered him to pay a fine of $7,500. Judge Robreno further sentenced Beacon Rock to three years of probation, and ordered the hedge fund to forfeit $475,905 and to pay a fine of $600,000.

The criminal action began with an Information filed on March 20, 2007, by the U.S. Attorney for the Eastern District of Pennsylvania, charging Beacon Rock and Gerbasio with securities fraud. 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 charged 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. 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, resulting in more than 26,000 Beacon Rock market timing trades. The U.S. Attorney charged Beacon Rock and Gerbasio with, and the defendants pled guilty to, 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. On March 30, 2006, the U. S. District Court for the Eastern District of Pennsylvania entered a Final Judgment by consent, 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 Administrative Proceeding No. 3-11908, Release No. 34-53622 (April 10, 2006).

 

http://www.sec.gov/litigation/litreleases/2008/lr20567.htm


Modified: 05/12/2008