SEC ALSO TO EXPAND CASE AGAINST BEACON HILL
On June 15, 2004, the Securities and Exchange Commission filed, subject to the approval of the Court, an amended complaint in this pending action naming as defendants the four principals of Beacon Hill Asset Management LLC, a hedge fund manager located in Summit, New Jersey, and expanding the charges against Beacon Hill. The four principals are John D. Barry, the President, Thomas P. Daniels, the Chief Investment Officer, John M. Irwin, the Senior Portfolio Manager, and Mark P. Miszkiewicz, the Chief Financial Officer. The SEC filed the original complaint in this action on November 7, 2002, charging Beacon Hill with fraud. The case was stayed from February 24, 2003 until May 31, 2004.
The amended complaint alleges that the four principals of Beacon Hill together implemented a fraudulent scheme that resulted in investors losing more than $300 million. The allegations are that from at least the beginning of 2002 through October 2002, Beacon Hill and its principals made material misrepresentations to investors and engaged in other fraudulent conduct. The misrepresentations concerned the methodology Beacon Hill used for calculating the net asset values of the hedge funds it managed; the hedging and trading strategy for the purportedly "market neutral" funds; and the value and performance of the funds.
The SEC further alleges that central to Beacon Hill's fraud was its method of valuing securities in the hedge funds to show steady and positive returns. Beacon Hill manipulated its valuation procedures for the Master Fund, the core hedge fund that held and traded securities in Beacon Hill's three feeder hedge funds. The manipulative conduct allowed Beacon Hill to report steady growth and hide losses in these hedge funds during 2002.
The amended complaint further alleges that as the value of these Beacon Hill hedge funds decreased over the summer of 2002, Beacon Hill nevertheless continued to report positive returns. Beacon Hill increasingly inflated the prices of the securities in the Master Fund to maintain the appearance of positive returns. At the same time, contrary to what it was telling investors, Beacon Hill made an increasing and ultimately unsuccessful bet on interest rates rising in an attempt to cover its hidden losses.
In addition, the SEC alleges that Beacon Hill entered into a series of trades between the Master Fund and certain other accounts it managed for two institutional clients (the "managed accounts") at prices that defrauded the Master Fund and allowed the managed accounts, whose performances had also declined, to reap substantial profits. Beacon Hill was able to hide the losses resulting from these fraudulent trades by inflating the value of the securities in the Master Fund to an even greater extent.
Finally, the amended complaint alleges that in September 2002, as their scheme started to unravel, three of the four principals liquidated an account in which they were the only investors by selling the securities in their account to the Master Fund without disclosure to investors. In early October 2002, when Beacon Hill's prime broker challenged the valuation of the Master Fund and Beacon Hill was forced to admit it had sustained losses, the principals misrepresented the magnitude of the actual losses in an attempt to save Beacon Hill's operations and make the losses appear to be the result of market conditions. On October 17, 2002, Beacon Hill finally announced the full extent of investor losses, admitting that, as of September 30, the NAVs of its hedge funds had declined 54% from previously reported August 31, 2002 levels, and further acknowledging that it had mis-priced securities in the funds prior to August.
The SEC alleges that by engaging in this conduct, Beacon Hill, Barry, Daniels, Irwin, and Miszkiewicz violated Section 17(a)(1), (2) and (3) of the Securities Act of 1933, and Section 10(b) of the Exchange Act of 1934 and Rule 10b-5 thereunder. Additionally, through this conduct Beacon Hill violated Sections 206(1), (2) and (3) of the Investment Advisers Act of 1940, and defendants Barry, Daniels, Irwin, and Miszkiewicz aided and abetted Beacon Hill's violations of these sections. The Commission seeks from the defendants permanent injunctions, disgorgement plus prejudgment interest, and civil penalties. The amended complaint also names as relief defendants and seeks disgorgement from the wives of the principals of Beacon Hill.
The Commission's investigation is continuing.
For information regarding the original complaint filed in this matter, see Lit. Rel. No. 17831 (November 7, 2002).
