U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19427 / October 13, 2005
SECURITIES AND EXCHANGE COMMISSION V. JOSEPH W. DANIEL, U.S. District Court for the Southern District of New York, Civil Action No. 05 CV 8338 (S.D. New York September 28, 2005)
COMMISSION SUES NEW YORK HEDGE FUND MANAGER FOR FRAUD
On September 28, 2005, the Commission filed securities fraud charges in the United States District Court for the Southern District of New York against Joseph W. Daniel, former managing partner of the Critical Infrastructure Fund (the Fund), a hedge fund based in New York that invested primarily in telecommunications and internet companies. The Fund had 50 investors who invested a total of approximately $7 million.
The Commission's Complaint alleges that Daniel was managing partner for the Fund from March 1999 to February 2002, and during that time was responsible for valuing private placement investments held in the Fund's portfolio. The Complaint further alleges that Daniel wrote up the value of the Fund's private placement investments by over 20%. Starting in at least December 2000, however, Daniel improperly failed to write down the value of the private placement investments when those companies encountered financial difficulties, even when some declared bankruptcy. As a result, Daniel made misrepresentations to investors about the value of their investments in the Fund and the Fund's performance, allowed certain investors to redeem their shares at inflated values to the detriment of the remaining investors, and inflated the management fees paid by investors. These events caused significant losses for investors. In addition, the Complaint alleges that when new investors invested in the Fund in December 2001 and January 2002, Daniel made misrepresentations about the Fund's assets, performance, and the percentage of assets the Fund invested in private placements.
Daniel consented, without admitting or denying the allegations in the Complaint, to the entry of a Final Judgment which enjoins him from future violations of Sections 17(a)(1), (2) and (3) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1) and (2) of the Investment Advisers Act of 1940. The Judgment was entered on October 7, 2005 and also orders Daniel to disgorge $97,152.60, but waives payment of disgorgement and seeks no penalty based on the sworn representations in his Statement of Financial Condition and other documents and information submitted to the Commission.