Litigation Release No. 22262 / February 17, 2012

SEC v. Pentagon Capital Management PLC et al., 08 Civ. 3324 (RWS) (S.D.N.Y.)


On Tuesday, February 14, 2012, United States District Judge Robert W. Sweet of the Southern District of New York issued an Opinion in favor of the U.S. Securities and Exchange Commission finding that United Kingdom-based hedge fund adviser Pentagon Capital Management PLC (PCM) and Lewis Chester, PCM's Chief Executive Officer, engaged in securities fraud in violation of the Securities Act of 1933 and the Securities Exchange Act of 1934. Specifically, Judge Sweet found that Defendants PCM and Chester orchestrated a scheme to defraud mutual funds in the United States through late trading from February 2001 through September 2003. Late trading refers to the practice of placing orders to buy, redeem, or exchange U.S. mutual fund shares after the time as of which the funds calculate their net asset value (usually as of the close of trading at 4:00 p.m. ET), but receiving the price based on the net asset value already determined as of 4:00 p.m. ET. Judge Sweet found that the Defendants "intentionally, and egregiously violated the federal securities laws through a scheme of late trading" through broker-dealer Trautman Wasserman & Company, Inc. (TW&Co.), and found that the scheme was "broad ranging over the course of several years and in no sense isolated."

As a result of Defendants' conduct, the Court found that PCM and Chester violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, and granted the Commission's request to enjoin PCM and Chester from future violations of those provisions. Judge Sweet further found PCM and Chester, together with Relief Defendant Pentagon Special Purpose Fund, Ltd., PCM's advisory client, jointly and severally liable for disgorgement of $38,416,500 of profits from the U.S. mutual fund trades executed through TW&Co. plus prejudgment interest. Finally, Judge Sweet imposed civil penalties against Defendants in the amount of $38,416,500, equal to Defendants' pecuniary gain for late trades through TW&Co.

The Court found in Defendants' favor regarding charges of deceptive market timing of U.S. mutual funds.

Chester, age 43, is a resident of London, England. PCM is an investment adviser and investment manager based in London, England, and it is registered with the United Kingdom Financial Services Authority. Pentagon Special Purpose Fund, Ltd. is an international business company incorporated in the British Virgin Islands.

See also Litigation Release No. 20516 (April 3, 2008).