SEC Charges Two Florida-Based Fund Managers With Facilitating Petters Ponzi Scheme
FOR IMMEDIATE RELEASE
Washington, D.C., Oct. 14, 2010 — The Securities and Exchange Commission today charged two Florida-based hedge fund managers and their firms with fraudulently funneling more than a billion dollars of investor money into a Ponzi scheme operated by Minnesota businessman Thomas Petters.
The SEC alleges that Bruce F. Prévost of Palm Beach Gardens and David W. Harrold of Del Ray Beach falsely assured their investors and potential investors that the flow of their money would be safeguarded by collateral accounts and described a phony process for protecting their assets. When Petters was unable to make payments on investments held by the funds they managed, Prévost, Harrold, and their firms concealed it from investors by concocting sham note exchange transactions with Petters, who the SEC charged last year along with an Illinois-based hedge fund manager who also facilitated the scheme.
"Prévost and Harrold portrayed themselves as guardians of their hedge fund investors while in fact they facilitated Tom Petters's fraudulent scheme through lies and deceit," said Robert Khuzami, Director of the SEC's Division of Enforcement. "Their betrayal cost investors more than one billion dollars, while they pocketed millions in fees."
The SEC's complaint filed in U.S. District Court for the District of Minnesota alleges that Prévost, Harrold, and their firms Palm Beach Capital Management LP and Palm Beach Capital Management LLC invested more than $1 billion in hedge fund assets with Petters while pocketing more than $58 million in fees. Petters promised investors that their money would be used to finance the purchase of vast amounts of consumer electronics by vendors who then re-sold the merchandise to such "Big Box" retailers as Wal-Mart and Costco. In reality, Petters's "purchase order inventory financing" business was merely a Ponzi scheme. There were no inventory transactions. Petters sold promissory notes to feeder funds like those controlled by Prévost, Harrold, and their firms, and Petters used some of the note proceeds to pay returns to earlier investors, diverting the rest of the cash to his own purposes.
According to the SEC's complaint, Prévost, Harrold, and their firms funneled money into the Petters Ponzi scheme beginning as early as 2004 through at least June 2008. Prévost and Harrold sold interests in their Palm Beach Funds to individuals, foundations, family trusts and other hedge funds throughout the U.S. The Palm Beach Funds invested all investor contributions into the Petters Ponzi scheme and were holding more than $1 billion worth of notes when the scheme collapsed.
The SEC alleges that Prévost, Harrold, and their firms falsely assured investors that the inventory financing transactions were structured in such a way that after the retailers received their merchandise from vendors, they were supposed to send their payments for the merchandise directly into the funds' collateral accounts to pay off the notes held by the funds. This arrangement purported to protect investors inasmuch as the receipt of funds directly from the retailers would ostensibly verify their participation in each transaction. But in reality, money for the repayment of notes held by the funds always came directly from Petters and never came from any retailers. Prévost and Harrold did not disclose this material fact to investors in the funds, and instead continued to lie about the operation of the collateral accounts.
The SEC further alleges that Prévost, Harrold, and their firms devised with Petters a series of bogus note exchange transactions beginning around February 2008. The Palm Beach Funds on multiple occasions exchanged groups of mature notes that were due to be repaid on or about the date of the exchange for newly-issued notes that were not due to be paid for six months and purported to be collateralized by different merchandise associated with different inventory finance transactions. Instead of receiving cash repayments and then reinvesting that cash in new notes as they had done in the past, Prévost and Harrold simply began exchanging old IOUs for new ones, ultimately swapping the vast majority of notes held by the funds. Meanwhile, they continued to falsely report in monthly communications to investors that the funds were generating the same steady profits they had generated since their inceptions. These overstated rates of return resulted in the payment of excessive fees to Prévost, Harrold, and their firms.
The SEC's complaint charges Prévost, Harrold, and their firms with violations of 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 Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206-4(8) thereunder. The SEC seeks entry of a court order of permanent injunction against Prévost, Harrold, and their firms, as well as an order of disgorgement, including prejudgment interest and financial penalties.
Andrew P. O'Brien, Donald A. Ryba, Barry Isenman and Peter K.M. Chan of the SEC's Chicago Regional Office conducted the SEC's investigation. The SEC's litigation will be led by Daniel J. Hayes and John E. Birkenheier. The SEC's investigation is continuing.
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For more information about this enforcement action, contact:
Timothy L. Warren
Associate Regional Director, SEC's Chicago Regional Office
Peter K.M. Chan
Assistant Regional Director, SEC's Chicago Regional Office