U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20524 / April 10, 2008
SEC v. Headstart Advisers Limited, 08 CV 3484 (DAB) (SDNY)
Commission Files Fraud Charges Against United Kingdom-Based Hedge Fund Adviser 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 Headstart Advisers Limited (HAL) and its "Chief Investment Adviser," Najy N. Nasser. The complaint alleges that HAL and Nasser orchestrated a scheme to defraud mutual funds in the United States and their shareholders through late trading and deceptive market timing. HAL's advisory client, Headstart Fund Ltd., obtained approximately $198 million in illicit profits through this scheme, at the expense of U.S. mutual funds and their shareholders. The Commission named the Headstart Fund as a relief defendant.
The Commission's complaint names the following defendants/relief defendant:
- HAL is an investment adviser based in London, England. During the relevant period, HAL served as the investment adviser to Headstart Fund. HAL was formerly known as Folkes Asset Management Ltd.
- Nasser, age 39, is a resident of the Principality of Monaco. Nasser joined HAL in 1997 and has served as HAL's Chief Investment Adviser. Nasser is currently HAL's sole director. Nasser is a graduate of the London School of Economics with a master's degree in accounting and finance.
- Headstart Fund was incorporated in the Bahamas in December 2001 as an open-ended company with limited liability.
The Commission's complaint alleges the following. From approximately September 1998 through September 2003, HAL actively traded U.S. mutual funds through Headstart Fund's accounts at numerous broker-dealers in the United States. HAL routinely engaged in late trading of U.S. mutual funds. HAL placed orders on behalf of its client, the Headstart 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 Headstart Fund to profit â" at the expense of other shareholders in the U.S. mutual funds â" from market events that occurred after 4:00 p.m. ET, but that were not reflected in the price that Headstart Fund paid for the mutual fund shares.
HAL and Nasser also used deceptive techniques to market time U.S. mutual funds. For example, HAL opened numerous accounts on behalf of Headstart Fund at various U.S. broker-dealers, and split Headstart Fund trades among multiple accounts to keep the size of the trades below a certain threshold that mutual funds monitored in order to conceal the extent of Headstart Fund's trading from U.S. mutual fund companies. HAL also used multiple accounts so that when a U.S. mutual fund company detected Headstart Fund's market timing and informed the U.S. broker-dealers through whom the trades had been placed to stop, HAL would simply transfer funds to a new brokerage account of which the U.S. mutual fund company was not yet aware, and then resume market timing within the same U.S. mutual fund company.
HAL, Nasser, and Headstart Fund benefited from this late trading and deceptive market timing at the expense of other shareholders in the U.S. mutual funds. Headstart Fund earned illicit profits of approximately $198 million from its late trading and deceptive market timing of U.S. mutual funds. HAL and Nasser obtained ill-gotten gains from the late trading and deceptive market timing scheme through, among other things, their receipt of performance and management fees for managing the Headstart Fund.
As a result of this conduct, HAL and Nasser 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 HAL and Nasser; (ii) ordering HAL, Nasser, and the Headstart Fund to disgorge their ill-gotten gains and to pay prejudgment interest; and (iii) imposing civil money penalties against HAL and Nasser.
