On June 16, 2004, the Securities and Exchange Commission filed a complaint alleging hedge fund fraud perpetrated by Conrad Seghers, age 36, a resident of Garland, Texas, and James Dickey, age 37, a resident of Flower Mound, Texas. The Commission's complaint, filed in federal court in Dallas, alleges that from June 2000 through September 2001, Seghers and Dickey fraudulently offered and sold securities in three Texas-based hedge funds, Integral Equity, LP, Integral Hedging, LP, and Integral Arbitrage, LP (collectively, the Funds). During this period, the Funds raised over $71.6 million from approximately 30 investors.
The Commission alleges that Seghers controlled and made investment decisions for the Funds through Integral Investment Management, LP, and that Dickey marketed the Funds to investors. As alleged in the complaint, Seghers and Dickey fraudulently offered the Funds' securities by failing to disclose to investors the substantial losses the Funds incurred and that Seghers was overstating the Funds' assets. Seghers caused the Funds' assets to be overstated by amounts ranging from 13% to 77% per month. The Commission further alleges that Seghers misrepresented to a potential investor, The Art Institute of Chicago, that certain brokerage firm errors did not affect one of the hedge funds, Integral Arbitrage, LP, when, in fact, they did. Based on this statement, The Art Institute invested $22.5 million in Integral Arbitrage, LP.
The Commission also alleges that Seghers and Dickey misrepresented to investors that the Funds had prominent brokerage firms at various times as their "prime broker," when the Funds never had a prime broker. In a prime brokerage relationship, the prime broker is a broker-dealer that, among other things, clears and finances customer trades made at other brokerage firms at the customer's request.
The Commission charged Seghers and Dickey with violating the securities registration and antifraud provisions of the federal securities laws, Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and also charged Seghers with violating the antifraud provisions of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 and Dickey with violating the broker-dealer registration provisions of Section 15(a) of the Exchange Act. The Commission seeks permanent injunctions, disgorgement with prejudgment interest, and civil penalties against Seghers and Dickey.
In addition, the Commission instituted and settled public administrative and cease-and-desist proceedings against Samer M. El Bizri and his company, Bizri Capital Partners, Inc. ("BCP"). [In the Matter of Samer M. El Bizri and Bizri Capital Partners, Inc., Administrative Proceeding File No. 3-11521] The Commission found that Bizri, a resident of Los Angeles, California, and BCP were primarily responsible for investing the majority of the Funds' assets through an account at a broker-dealer. By the end of March 2001, Bizri believed that the broker-dealer had made significant errors in the account that prevented him from valuing the account. Despite this, Bizri continued to accept new investor funds and traded the Funds' assets in the account. In addition, by the end of March 2001, Bizri knew that the account statements reported substantial losses. Bizri received monthly account statements purporting to reflect the value of BCP's holdings in the Funds. These statements failed to show the substantial losses that the Funds incurred in the account. Thus, Bizri knew, or was reckless in not knowing, that investors received account statements that materially overstated the value of their interests in the Funds.
Bizri and BCP, without admitting or denying the Commission's findings, consented to an order that (1) ordered Bizri and BCP to cease-and-desist from committing or causing any violations and any future violations of the antifraud provisions of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act; (2) barred Bizri from association with any investment adviser, with the right to reapply for association after five years; (3) prohibited Bizri and BCP from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter, with the right to reapply for service in any such capacity after five years; and (4) directed Bizri and BCP to pay a $50,000 civil penalty.
