U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20516 / April 3, 2008
SEC v. Pentagon Capital Management PLC, 08 CV 03324 (RWS) (SDNY)
Commission Files Fraud Charges Against United Kingdom-Based Hedge Fund Adviser and its Chief Executive Officer for Defrauding United States Mutual Funds Through Late Trading and Deceptive Market Timing
The Securities and Exchange Commission today filed a civil action in the U.S. District Court for the Southern District of New York against United Kingdom-based hedge fund adviser Pentagon Capital Management PLC (PCM) and its Chief Executive Officer, Lewis Chester. The complaint alleges that PCM and Chester orchestrated a scheme to defraud mutual funds in the United States and their shareholders through late trading and deceptive market timing. PCM's advisory client, Pentagon Special Purpose Fund, Ltd., obtained approximately $62 million in illicit profits through this scheme, at the expense of U.S. mutual funds and their shareholders. The Commission named the Pentagon Fund as a relief defendant.
The Commission's complaint names the following defendants/relief defendant:
The Commission's complaint alleges the following. From approximately June 1999 through September 2003, PCM actively traded U.S. mutual funds through Pentagon Fund's accounts at numerous broker-dealers in the United States. PCM and Chester routinely engaged in late trading of U.S. mutual funds. PCM placed orders on behalf of the Pentagon Fund, to buy, redeem, or exchange mutual fund shares after the 4:00 p.m. Eastern Time (ET) market close while still receiving the current day's mutual fund price. This illegal practice enabled Pentagon Fund to profit - at the expense of other shareholders in the U.S. mutual funds - from market events that occurred after 4:00 p.m. ET, but that were not reflected in the price that Pentagon Fund paid for the mutual fund shares.
PCM and Chester also used deceptive techniques to market time U.S. mutual funds. For example, PCM opened numerous accounts for the Pentagon Fund at various U.S. broker-dealers, and split Pentagon Fund trades among these multiple accounts to hide the extent of the Pentagon Fund's trading from mutual fund companies. PCM also used multiple accounts so that when a U.S. mutual fund detected market timing and informed the Pentagon Fund to stop, PCM would simply transfer funds to a new Pentagon Fund brokerage account that the U.S. mutual fund was unaware of, and Pentagon Fund would then resume market timing the same mutual fund.
PCM, Chester, and the Pentagon Fund benefited from this late trading and deceptive market timing scheme at the expense of the U.S. mutual funds and their shareholders. Pentagon Fund earned illicit profits of approximately $62 million. PCM and Chester obtained ill-gotten gains, including performance and management fees for managing the Pentagon Fund.
As a result of this conduct, PCM and Chester violated Section 17(a) of the Securities Act of 1933, and violated, or aided and abetted violations of, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5. The complaint seeks as relief a final judgment: (i) permanently enjoining PCM and Chester; (ii) ordering PCM, Chester, and the Pentagon Fund to disgorge their ill-gotten gains and to pay prejudgment interest; and (iii) imposing civil money penalties against PCM and Chester.