SEC Charges Connecticut-Based Hedge Fund Managers with Fraud
The Securities and Exchange Commission today charged a pair of hedge fund managers and their Connecticut-based advisory firm New Stream Capital with lying to investors about their fund’s structure and financial condition before it failed during the financial crisis.
The SEC alleges that the firm’s co-owners David Bryson and Bart Gutekunst secretly revised the fund’s capital structure before it collapsed in order to placate its largest investor, Gottex Fund Management. Bryson and Gutekunst then directed New Stream’s marketing department to continue marketing the hedge fund as though all investors were on the same footing when in fact Gottex had priority over other fund investors in the event of the fund’s liquidation.
The SEC additionally charged New Stream’s former chief financial officer Richard Pereira and former head of investor relations Tara Bryson, who is David Bryson’s sister. She agreed to settle the SEC’s charges. New Stream’s Cayman Islands affiliate also was charged in the scheme, which allowed the hedge fund managers to raise nearly $50 million and receive lucrative fees while leaving investors with nearly worthless holdings when the fund went bankrupt.
“Hedge fund managers who put greed ahead of full disclosure to investors violate a fundamental trust,” said George S. Canellos, Acting Director of the SEC’s Division of Enforcement. “Bryson and Gutekunst told investors they were all investing on equal terms when in fact some were investing in a fund that had been secretly restructured to their detriment.”
In a parallel action, the U.S. Attorney for the District of Connecticut today announced criminal charges against Bryson, Gutekunst, and Pereira.
According to the SEC’s complaint filed in federal court in Connecticut, New Stream managed a $750 million hedge fund focused on illiquid investments in asset-based lending. In March 2008, Bryson and Gutekunst revised the fund’s capital structure after Gottex, a fund manager with nearly $300 million invested in New Stream, had threatened to redeem its investment. A restructuring of the New Stream hedge fund a few months earlier had created two new feeder funds and eliminated the preferential liquidation rights previously enjoyed by the feeder fund through which Gottex had invested. Bryson told others at New Stream that if Gottex withdrew, the firm’s hedge fund business would “tank.”
The SEC alleges that revealing to all investors that New Stream restructured to favor Gottex would have made it much harder for the firm to attract and retain investors. Public disclosure also would have jeopardized cash flow from a lucrative fee arrangement that the fund’s managers put in place in late 2007. So the fund instead used misleading marketing documents that omitted the change, and Pereira as CFO falsified the fund’s financial statements to conceal the restructuring. Investors who asked about redemption levels were not told about the Gottex redemption request and others that followed. For example, Gutekunst falsely told one investor in June 2008 that there was nothing remarkable about the level of redemptions that New Stream had received and that there were no liquidity concerns.
According to the SEC’s complaint, as the financial crisis worsened in September 2008, New Stream was facing $545 million in redemption requests and was forced to suspend further redemptions and cease raising new funds. After several failed attempts at restructuring, New Stream and its affiliated entities filed for bankruptcy in March 2011.
The SEC’s complaint charges Bryson, Gutekunst, and Pereira with violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Bryson and Gutekunst are charged with violating Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder, and Pereira is charged with aiding and abetting their violations of Section 206(4). The SEC is seeking a variety of sanctions and relief against them including injunctions, disgorgement of ill-gotten gains with prejudgment interest, and penalties.
In the settlement with Tara Bryson, which is subject to court approval, she agreed to be permanently enjoined from further violations of the provisions of the securities laws at issue in this case. She also agreed to be permanently barred from the securities industry.
The SEC’s investigation, which is continuing, was conducted by Sheldon Pollock, Lisa Knoop, Alan Maza, Kevin McGrath, Alistaire Bambach, Scott York, and George Stepaniuk of the New York Regional Office. The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of Connecticut, the Federal Bureau of Investigation, and the U.S. Department of Labor’s Office of Labor Racketeering and Fraud Investigations.