U.S. Securities and Exchange Commission
Litigation Release No. 18432 / October 29, 2003
SEC Charges Former Hedge Fund Manager Edward Strafaci for Fraudulent Valuation
Securities and Exchange Commission v. Edward J. Strafaci, 03 CV 8524 (CSH) (S.D.N.Y. )
On October 29, 2003, the Securities and Exchange Commission filed an enforcement action against Edward J. Strafaci, the former portfolio manager of the Lipper convertible hedge funds, charging him with fraud in connection with the valuation of the funds. Simultaneously, the Office of the United States Attorney for the Southern District of New York announced Strafaci's indictment on criminal charges arising from the same conduct.
The Commission's complaint, filed in the United States District Court for the Southern District of New York, alleges that from at least 1998 until January 2002, Strafaci knowingly and recklessly overstated the value of the convertible bonds and preferred stock held by the funds, resulting in the dissemination of materially false and misleading fund valuations and performance figures to investors and prospective investors, and the filing of false reports with the Commission. The complaint alleges that, contrary to representations in the funds' offering materials, Strafaci valued the Funds' convertible securities at prices materially in excess of, and not reasonably related to, market prices or the fair value of such securities.
The hedge funds involved are:
Each of the funds was allegedly managed by Lipper & Company, L.P., an investment adviser registered with the Commission, or an affiliate (collectively, the "Managing Entities"); three of the funds were registered with the Commission as broker-dealers.
According to the complaint, during the relevant period, Strafaci was the portfolio manager for each of the funds and was an executive vice-president and the Director of Fixed Income Money Management for the Managing Entities. Strafaci resigned these positions in January 2002, and is now allegedly the majority shareholder of, and portfolio manager for, a hedge fund holding company. He resides in Colts Neck, New Jersey.
The complaint charges Strafaci with violating or aiding and abetting violations of certain antifraud provisions of the federal securities laws and with aiding and abetting various books-and-records and reporting provisions applicable to registered investment advisers and broker-dealers. Specifically, the complaint charges that Strafaci violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder; and aided and abetted violations of Section 17(a) of the Exchange Act and Rules 17a-3(a)(2), 17a-3(a)(11), 17a-4(b)(8) and 17a-5(d) thereunder; and Sections 204, 206(1) and 206(2) of the Investment Advisers Act of 1940 and Rules 204-2(a)(16) and 204-2(e)(3) thereunder. The complaint seeks a permanent injunction, disgorgement, and civil money penalties. The litigation is pending.
The Commission's investigation is continuing.