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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 16838 / December 21, 2000

Securities and Exchange Commission v. Michael L. Smirlock and LASER Advisers Inc., 00 Civ. 9680 (RO) (S.D.N.Y.)

SEC CHARGES INVESTMENT ADVISER AND ITS FORMER CEO WITH DEFRAUDING INVESTORS IN THREE HEDGE FUNDS

Michael L. Smirlock and LASER Advisers Inc. Charged With Securities Fraud

The Securities and Exchange Commission today filed an enforcement action charging Michael L. Smirlock and LASER Advisers Inc., an investment adviser, with defrauding investors in three hedge funds. Smirlock, 44, of Loveladies, NJ, is the Chairman, majority shareholder and former President and CEO of LASER. LASER is located in Short Hills, N.J. Smirlock and his firm are charged with engaging in a scheme to falsely inflate the value of an investment portfolio that they managed for the three hedge funds. As a result of the scheme, the value of the assets held in the investment portfolio were overstated by $71 million. According to the complaint, certain of the investors in the hedge funds purchased interests while Smirlock conducted this scheme.

The Commission's complaint alleges as follows:

  • Among the investments purchased by Smirlock and LASER for the hedge funds' investment portfolio were options on interest rate swaps, also known as swaptions. Swaptions are thinly traded, and difficult to value.

  • LASER and Smirlock were required to obtain on a monthly basis independent price valuations ("third-party prices") from broker-dealers for certain investments, including swaptions, purchased for the hedge funds' portfolio. The third party prices were used to prepare monthly and quarterly reports that were provided to investors in the hedge funds.

  • From late 1997 through the first half of 1998, as interest rates declined, so did the value of certain investments held in the hedge funds' portfolio, causing losses in the portfolio.

  • In order to conceal those investment losses, Smirlock inflated the values that he reported for certain of the swaptions owned by the hedge funds' portfolio. Smirlock was able to inflate those values by obtaining third party prices for similar, but more valuable, swaptions. He then substituted the prices of the more valuable swaptions for the swaptions actually owned by the hedge fund portfolios. As a result, he caused false and misleading valuations to be reported to the hedge funds investors. By the time that the fraud was discovered, the value of the investment fund portfolio was overstated by $71 million or 17 percent.

  • Smirlock also forged and altered documents in an effort to cover up his fraudulent conduct. For example, Smirlock instructed broker-dealers to return to him pricing sheets with blank bids. Smirlock then entered inflated prices for those investments on the pricing sheets.

The complaint charges that, following the initial revelation of his fraudulent conduct, Smirlock resigned as President and CEO of Laser Advisers; however, he continues to be the majority shareholder and to function as a director and Chairman of the Board.

Smirlock was the subject of a previous SEC enforcement action. In November 1993, he was charged with aiding and abetting violations of the antifraud and recordkeeping provisions of the Investment Advisers Act of 1940, and ordered to cease and desist from future violations and to pay a $50,000 penalty. Smirlock was also suspended for three months from association with any investment adviser.

According to the complaint filed today, by engaging in the described conduct, Smirlock and LASER Advisers Inc. violated the antifraud provisions of the Securities Exchange Act of 1934 (Section 10(b) and Rule 10b-5 thereunder); LASER Advisers Inc. violated the antifraud provisions of the Investment Advisers Act and Smirlock aided and abetted those violations (Sections 206(1) and 206(2)); and LASER Advisers Inc. violated the recordkeeping provisions of the Investment Advisers Act of 1940 and Smirlock aided and abetted those violations (Section 204 and Rules 204-2(a)(16) and 204-2(e)(3) thereunder). Smirlock is also charged with violating the Commission's November 1993 cease-and-desist order.

The Commission is seeking permanent injunctions, disgorgement plus prejudgment interest, and civil penalties against both Smirlock and LASER Advisers Inc.

The United States Attorney for the Southern District of New York has filed criminal charges against Smirlock, arising from the same conduct charged in the SEC complaint.

http://www.sec.gov/litigation/litreleases/lr16838.htm


Modified:12/21/2000