U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19187 / April 15, 2005
Securities and Exchange Commission v. Peter Krieger, Sheldon Krieger and John Madey, Case No. 05-80312-CIV-MIDDLEBROOKS/JOHNSON (S.D. Fla., filed April 12, 2005)
On April 12, 2005, the Securities and Exchange Commission (Commission) filed a complaint in the United States District Court, Southern District of Florida, alleging securities fraud against Peter Krieger, Sheldon Krieger and John Madey for alleged misconduct that occurred in connection with their operation of a defunct hedge fund. The Commission's complaint alleges that from June 1999 through December 2000, the defendants, acting as principals of a hedge fund called KFSI Equity Fund, L.P. (KFSI Fund), misappropriated more than $3.7 million of the $7.5 million raised by the KFSI Fund. The defendants raised money from approximately 45 investors by claiming that the KFSI Fund would generate profits by trading in securities.
The Commission's complaint alleges that in early 2000, the defendants began diverting money in the KFSI Fund to pay for the operations of a broker-dealer the defendants controlled, Krieger Financial Services, Inc. (Krieger Financial), and to pay for their own personal expenses. According to the Commission's complaint, Peter Krieger was the president, director and control person of Krieger Financial and directed most of the trading activity in the KFSI Fund; Sheldon Krieger was a control person of Krieger Financial and participated in the day-to-day operations of the KFSI Fund; and Madey was the chief financial officer of Krieger Financial and the KFSI Fund.
According to the Commission's complaint, the defendants concealed their misappropriation of funds, as well as losses in the KFSI Fund as a result of unprofitable securities trades, by issuing false KFSI Fund account statements. The Commission's complaint alleges that these account statements materially overstated the value of customer accounts, and that these false account statements induced numerous investors to invest additional money in the KFSI Fund. The Commission's complaint also alleges that towards the end of 2000, when the KFSI Fund suffered significant losses due to unprofitable trades and the defendants' misappropriation of funds, the defendants defrauded investors again by promoting and selling fictitious bonds and promissory notes issued by Krieger Financial. According to the Commission's complaint, these fraudulent investments could not sustain the KFSI Fund or Krieger Financial, and both entities ceased operating in January 2001.
The Commission's complaint charges Peter Krieger, of West Palm Beach, Florida, Sheldon Krieger, of Jupiter, Florida, and John Madey, of Jupiter, Florida, with violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and with violating, or aiding and abetting violations of, Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The complaint seeks, among other things, injunctive relief, disgorgement and civil penalties.
In a simultaneous filing, the State of Florida's Office of Statewide Prosecution (OSP) issued a 15-count criminal information against Peter Krieger, Sheldon Krieger and Madey based on their activities at the KFSI Fund and Krieger Financial. The Commission acknowledges the assistance of the OSP, as well as the Securities Investor Protection Corporation, in this investigation.