U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19589 / March 3, 2006
SEC v. Sharon E. Vaughn and Directors Financial Group, Ltd., Case No. 06-C-1135 (N.D. Ill.)
SEC SUES INVESTMENT ADVISER FIRM AND ITS OWNER FOR FRAUD
Defendants Consent to Injunctions and Agree to Pay Over $800,000 in Disgorgement and Prejudgment Interest
The Securities and Exchange Commission ("Commission") announced on March 2, 2006, it filed a civil action in the U.S. District Court for the Northern District of Illinois charging Directors Financial Group, Ltd. ("DFG"), an Illinois investment adviser registered with the Commission, and Sharon E. Vaughn, DFG's owner and operator, with fraud and other securities violations.
The Commission's complaint alleges that Vaughn, a resident of Lake Forest, Illinois, and DFG defrauded their private hedge fund clients in Directors Performance Fund, L.L.C. (the "Fund"). According to the complaint,
- Vaughn and DFG invested $25 million of the Fund's assets in a fraudulent Prime Bank trading scheme (the "Trading Program") contrary to the Fund's disclosed trading strategy.
- Vaughn and DFG did not properly investigate (a) whether the Trading Program was a suitable investment, (b) the backgrounds of the Trading Program promoters, and (c) whether programs like the Trading Program are legitimate investments.
- Vaughn and DFG entered into an undisclosed profit sharing agreement with one of the Trading Program promoters.
- Vaughn and DFG transferred the Fund's $25 million to Akela Capital, Inc. ("Akela"), a separate entity that had no formal relationship to the Fund and was owned and controlled in part by the Trading Program promoters.
- Vaughn and DFG lost control over the Fund's investment in the Trading Program. They later redeemed the principal of four investors leaving the Fund unable to meet further redemption requests. Vaughn and DFG did not disclose these facts to the Fund's investors.
- The U.S. Attorney's Office for the Northern District of Illinois filed a criminal complaint against three individuals associated with the Trading Program who were subsequently arrested. After the arrests, another individual affiliated with the Trading Program wired $21.6 million to an Akela account, claiming that the $21.6 million along with prior payments to Akela, represented a complete return of Akela's capital.
In a Judgment dated March 2, 2006, the Honorable Judge Charles P. Kocoras permanently enjoined DFG and Vaughn from violating antifraud provisions of the Securities Act of 1933 [Section 17(a)], the Securities Exchange Act of 1934 [Section 10(b) and Rule 10b-5], and the Investment Advisers Act of 1940 [Sections 206(1) and (2)]. The Judgment also enjoins DFG from violating, and Vaughn from aiding and abetting violations of, record keeping provisions of the Investment Adviser's Act of 1940 [Section 204 and Rule 204-2]. The Judgment requires DFG and Vaughn to pay disgorgement and prejudgment interest totaling $808,820.07. DFG and Vaughn consented to the Judgment without admitting or denying the allegations in the complaint.
In a separate Order dated March 2, 2006, Judge Kocoras, among other things, froze the Fund's remaining assets including the $21.6 million and authorized the distribution of over $20 million to Fund investors, which allowed for a return of their principal investment and profits prior to investment in the Trading Program.
The Commission acknowledges the assistance of the U.S. Attorney's Office for the Northern District of Illinois and the U.S. Secret Service's Chicago Field Office.
