U.S. Securities and Exchange Commission
Litigation Release No. 22079 / August 31, 2011
Securities and Exchange Commission v. Belal K. Faruki, et al., Civil Action No. 11-cv- 05406 (N.D. Ill. filed August 10, 2011)
The Securities and Exchange Commission today announced an asset freeze against a Chicago-area money manager and his hedge fund advisory firm that the SEC charged with lying to prospective investors in their startup quantitative hedge fund. A federal court lifted a seal order in the case on Monday, August 29, 2011, after freezing the assets at the SEC's request. The Court also entered a Preliminary Injunction Order by Consent of all defendants today.
The SEC alleges that Belal K. Faruki, who lives in Aurora, Illinois, and his advisory firm, Neural Markets, LLC., presented themselves as managers of a start-up quantitative hedge fund with a history of successful trading. According to the complaint, since early 2010 Faruki and Neural Markets have solicited several highly sophisticated individuals to invest in the "Evolution Quantitative 1X Fund," a hedge fund that supposedly used a proprietary algorithm to carry out an arbitrage strategy involving trading in liquid ETFs, and defrauded at least one investor out of $1 million. The SEC alleges that Faruki and Neural Markets lied throughout the solicitation process about their performance track record; about the existence of other wealthy investors in the fund; that Faruki had invested his own money in the fund; and that Faruki and Neural Markets had engaged a top-tier auditor to assist in preparing quarterly and annual financial statements for the fund.
According to the SEC's complaint, filed in federal court in Chicago, Illinois, Faruki and Neural Markets solicited sophisticated investors by presenting themselves as managers of a start-up quantitative hedge fund that purportedly began trading in 2009. The complaint alleges that from January 2010 through at least October 2010, Faruki and Neural Markets made numerous false and misleading statements during their solicitation of investors. Faruki claimed that he had created the Evolution 1X Fund managed by Neural Markets and that the quant fund had a track record of positive returns since at least December 2009; that other wealthy investors had invested $5 million in the fund; that Faruki had invested his own money in the fund so that his interests were aligned with the other supposed investors; and that Faruki and Neural Markets had engaged a reputable auditor to audit quarterly and annual financial statements for Neural Markets and the fund. The SEC alleged that these claims were false as Faruki and Neural Markets did not have the performance track record they touted, the Evolution 1X Quantitative Fund attracted just one investor, Faruki never invested his own money in the fund and Faruki and Neural Markets never engaged the reputable audit firm. The SEC further alleged that, based on these misrepresentations, at least one highly sophisticated individual invested $1 million in the Evolution Quantitative 1X Fund. According to the complaint, Faruki and Neural Markets continued to deceive the investor after he invested money, falsely claiming that the fund had generated positive returns when, in reality, it suffered losses in two months of trading.
The Commission alleges that by engaging in the course of conduct described above, Faruki and Neural Markets violated 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 Section 206(4) of the Investment Advisers Act of 1940 (Advisers Act) and Rule 206(4)-8 therunder and, in the alternative, Faruki aided and abetted Neural Markets' primary violations of 206(4) of the Advisers Act and Rule 206(4)-8 thereunder. The SEC's complaint - filed August 10, 2011 - sought (i) emergency relief, including a temporary restraining order and asset freeze, (ii) permanent injunctions, disgorgement of ill-gotten gains and financial penalties from Faruki and Neural Markets, and (iii) disgorgement from relief defendants Evolution Quantitative 1X Fund and Evolution Quantitative 1X, LLC, based on allegations that they received ill-gotten gains. That same day, the Court granted the emergency relief requested by the SEC. The litigation continues on the claims and relief sought by the Commission.
On the same day the SEC filed its complaint on Aug. 10, 2011, the court granted the SEC's request for emergency relief including a temporary restraining order and asset freeze. The Preliminary Injunction Order entered today with the consent of the Defendants continues the terms of the TRO until the final resolution of the action.
The SEC's investigation of this matter continues.