SEC Press pdf 603 KB 16,871 chars

The SEC’s Office of Investor Education and Advocacy

Exhibit of SEC.gov | SEC Charges Hedge Fund Managers with Defrauding Investors

summary

Hedge fund managers have committed fraud by operating Ponzi schemes, misappropriating investor funds, and concealing conflicts of interest, resulting in SEC enforcement actions that exposed losses exceeding $60 million and highlighted the risks of inadequate regulation and opaque valuations.

paragraph

The SEC has pursued multiple fraud cases against hedge fund managers, including Jawed’s $37 million Ponzi scheme, Gerasimowicz’s diversion of assets to his private business, and Lion Capital’s theft of over $550,000 from a retired investor. In another case, Alleca caused $17 million in losses by using new investor money to cover redemptions and creating sham funds to conceal failures. These actions reveal systemic risks from lack of transparency, non-standardized valuations, and unregistered managers, despite fiduciary duties and anti-fraud protections under securities law.

narrative

Hedge funds pool capital from accredited investors and employ speculative strategies like leverage, short-selling, and derivatives, often with fewer regulatory requirements than mutual funds, increasing exposure to fraud and mismanagement. The SEC has brought enforcement actions against several managers, including Jawed, who ran a $37 million Ponzi scheme by using new investor funds to pay fake returns and finance personal expenses; Gerasimowicz, who diverted most fund assets into his privately owned business while misleading investors about diversification; and Lion Capital’s manager, who stole over $550,000 from a retired teacher using falsified account statements. In another case, Alleca caused $17 million in losses by recycling new investor money to cover redemptions and fabricating sham funds to hide failing investments. These frauds were enabled by opaque asset valuations, lack of independent audits, and insufficient disclosure of conflicts of interest, despite managers’ fiduciary duties. Investors are warned to scrutinize offering memoranda, confirm third-party custody and independent valuations, and verify manager registration via BrokerCheck and Form ADV. The SEC and other regulators emphasize that while hedge funds are not exempt from anti-fraud laws, their structural opacity demands heightened due diligence and independent legal or financial advice before investing.

Enriched metadata

Scheme: ponzi (97%)
Outcome: charged

Classified ponzi(confidence 97%). EDGAR detection: forms Form D· recall 35% / precision 15%. detection rule →

Extracted insights

Dollar amounts 3

$37.00M $37 million $10M–$100M
$17.00M $17 million $10M–$100M
$550K $550,000 $100K–$1M

Entities 5

person hedge funds
person investment adviser
person prohibitions against fraud
agency register or file public reports with sec
agency Securities and Exchange Commission

Triples 10

SEC issues Investor Bulletin on Hedge Funds
Hedge Funds pool investors' money
Hedge Funds use leverage, short-selling, and speculative investment practices
Hedge Fund Managers owe fiduciary duty to the funds they manage
Hedge Funds are subject to prohibitions against fraud
Hedge Fund Managers may not be required to register or file public reports with SEC
Hedge Fund Offering Documents contain information about investment strategies, risks, fees, expenses, and conflicts of interest
Leverage magnifies both potential gain and potential loss from an investment
Hedge Funds may invest in derivatives such as options and futures
Investment Adviser may have conflict of interest when recommending fund they manage

PDF

The SEC’s Office of Investor Education and Advocacy · Source

Text layers

Extracted body text (16,871c)

Investor Assistance (800) 732-0330 www.investor.gov
INVESTOR BULLETIN
Hedge Funds
The SEC’s Office of Investor Education and Advocacy
is issuing this Investor Bulletin to educate individual
investors about hedge funds.
What are hedge funds?
Hedge funds pool investors’ money and invest the
money in an effort to make a positive return. Hedge
funds typically have more flexible investment strategies
than, for example, mutual funds. Many hedge funds
seek to profit in all kinds of markets by using leverage
(in other words, borrowing to increase investment
exposure as well as risk), short-selling and other
speculative investment practices that are not often
used by mutual funds.
You generally must be an accredited investor, which
means having a minimum level of income or assets,
to invest in hedge funds. Typical investors include
institutional investors, such as pension funds and
insurance companies, and wealthy individuals. Hedge
funds are not subject to some of the regulations that are
designed to protect investors. Depending on the amount
of assets in the hedge funds advised by a manager, some
hedge fund managers may not be required to register
or to file public reports with the SEC. Hedge funds,
however, are subject to the same prohibitions against
fraud as are other market participants, and their managers
owe a fiduciary duty to the funds that they manage.
What information should I seek if I am
considering investing in a hedge fund?
n
Read a fund’s offering memorandum and
related materials. The hedge fund’s offering
documents and agreements contain important
information about investing in the fund, including
the investment strategies of the fund, whether the
fund is based in the United States or abroad, the risks
of the investment, fees earned by the hedge fund
manager, expenses charged to the hedge fund and the
hedge fund manager’s potential conflicts of interest.
It is important that you read all the documents before
making your decision to invest in a hedge fund. You
should consider consulting an independent financial
advisor before investing in a hedge fund.
n
Understand the fund’s investment strategy.
There are a wide variety of hedge funds with many
different investment strategies. Some hedge funds
will be diversified among many strategies, managers

Investor Assistance (800) 732-0330 www.investor.gov
2
and investments, while others may take highly
concentrated positions or may only use a single
strategy. Make sure you understand the level of risk
involved in the fund’s investment strategies and
ensure that they are suitable to your personal
investing goals, time horizons and risk tolerance.
As with any investment, generally the higher the
potential returns, the higher the risks you must
assume.
n
Determine if the fund is using leverage or
other speculative investment techniques.
Leverage is the use of borrowed money to make an
investment. A hedge fund using leverage will typically
invest both the investors’ capital and the borrowed
money to make investments in an effort to increase
the potential returns of the fund. The use of leverage
will magnify both the potential gain and the potential
loss from an investment. The use of leverage can
turn an otherwise conservative investment into an
extremely risky investment. A hedge fund may also
invest in derivatives (such as options and futures) and
use short-selling (selling a security it does not own) to
increase its potential returns, which could likewise
increase the potential gain or loss from an investment.
n
Evaluate potential conflicts of interest
disclosed by hedge fund managers. For
example, if your investment adviser recommends
that you invest in a fund that the adviser manages,
there may be a conflict of interest because your
adviser may earn higher fees from your investments
in the hedge fund than the adviser might earn from
other potential investments.
n
Understand how a fund’s assets are valued.
Hedge funds may invest in highly illiquid securities
that may be difficult to value. Moreover, many
hedge funds give themselves significant discretion in
valuing illiquid securities. You should understand
a fund’s valuation process and know the extent to
which a fund’s securities are valued by independent
sources. Valuations of fund assets will affect the fees
that the manager charges.
n
Understand how a fund’s performance is
determined. Hedge funds do not need to follow any
standard methodology when calculating performance,
and they may invest in securities that are relatively
illiquid and difficult to value. By contrast, federal
securities laws dictate how mutual funds can advertise
their performance by requiring specific ways to
calculate current yield, tax equivalent yield, average
annual total return and after-tax return, as well as
having detailed requirements for the types of disclosure
that must accompany any performance data. If you are
provided with performance data for the hedge fund, ask
whether it reflects cash or assets actually received by the
fund as opposed to the manager’s estimate of the change
in value of fund assets and whether the data includes
deductions for fees.
n
Understand any limitations on your right to
redeem your shares. Unlike mutual funds where
you can elect to sell your shares on any given day, hedge
funds typically limit opportunities to redeem, or cash
in, your shares (e.g., monthly, quarterly or annually),
and often impose a “lock-up” period of one year or
more, during which you cannot cash in your shares.
In the time it takes for you to redeem your shares,
their value could diminish and you will not have use
of the money invested in those shares. Furthermore,
hedge funds may charge you a redemption fee before
you are allowed to cash in your shares. Hedge funds
may also have authority to suspend redemptions
under certain circumstances, including in times of
market distress or when their investments are not
able to be quickly or easily liquidated.

Investor Assistance (800) 732-0330 www.investor.gov
3

n
Research the backgrounds of hedge fund
managers. Before entrusting your money to anyone,
research their background and qualifications. Make
sure hedge fund managers are qualified to manage
your money, and find out whether they have a
disciplinary history within the securities industry.
If the manager is registered with the SEC, you can
get this information (and more) by reviewing the
manager’s Form ADV. Form ADV is the uniform
form used by investment advisers to register with both
the SEC and state securities regulators. You can search
for and view a firm’s Form ADV using the SEC’s
Investment Adviser Public Disclosure (IAPD) website.
You also can get copies of Form ADV for individual
advisers and firms from the investment adviser, the
SEC’s Public Reference Room or the state securities
regulator where the adviser’s principal place of business
is located. If you don’t find the investment adviser firm
in the SEC’s IAPD database, be sure to call your state
securities regulator or search FINRA’s BrokerCheck
database for any information they may have.
Disciplinary history. In a recent action,
SEC v. GEI Financial Services, Inc., the SEC
alleged that a hedge fund manager failed to
disclose to his advisory clients that the State
of Illinois had barred him from acting as an
investment adviser.
What questions should I ask the hedge
fund manager before investing?
n
Ask about fees and expenses. Fees and expenses
affect your return on investment. Hedge funds
typically charge an annual asset management fee
of 1 percent to 2 percent of assets as well as a
“performance fee” of 20 percent of a hedge fund’s
profit. These fees are typically higher than the fees
charged by a mutual fund. A performance fee could
motivate a hedge fund manager to take greater risks
in the hope of generating a larger return.
Excessive fees. In GEI Financial Services, the
SEC also alleged that the hedge fund manager
withdrew excessive fees from the hedge fund
he managed. The amounts withdrawn allegedly
were based on fee calculations that substantially
differed from what the manager initially told
investors about how the fees were to be calculated.
Tip. A fund of hedge funds is an investment
company that invests in hedge funds—rather than
investing in individual securities. Funds of hedge
funds typically charge a fee for managing your
assets, and some may also include a performance
fee based on profits. These fees are charged in
addition to any fees paid to the underlying hedge
funds and, therefore, you will be paying two layers
of fees. You may wish to read FINRA’s investor
alert, which describes some of the costs and risks
of investing in funds of hedge funds.

n
Ask about how a fund’s assets are safe
guarded. A hedge fund’s manager generally has
authority to access and transfer the fund’s assets.
This authority can potentially be misused. To guard
against this, many hedge funds undergo an annual
financial audit by an independent auditor that
includes verification of the existence of the fund
assets. You should inquire about where a fund’s
assets are held (e.g., whether they are held in custodial
accounts at a reputable bank or broker) and whether
an independent third party confirms or otherwise
verifies the existence of the fund’s assets.

Investor Assistance (800) 732-0330 www.investor.gov
4
n

Manager malfeasance. In a recent action,
In the Matter of Gerasimowicz, the SEC’s
Enforcement Division alleged that, unbeknownst
to investors, a hedge fund manager over the
course of several years invested the majority of
a fund’s assets into a private business owned by
the manager’s affiliated company. The fund was
marketed as being invested primarily in public
equity securities with the aim of constructing a
“diversified portfolio” and employing “controlled
risk diversification.” The manager allegedly
failed to inform investors of this substantial
investment in a private business or the conflict of
interest resulting from the manager’s substantial
personal investments in the business. The
business ultimately filed for bankruptcy, and a
distribution to the fund to recover its investment
in the business is uncertain and could be very
small. Audited financial statements that were
months late in being prepared and delivered to
investors, if delivered at all, allegedly failed to
timely alert investors to the investment.

In another recent action, SEC v. Lion Capital
Management, LLC, the SEC alleged that a
manager used his hedge fund as a ruse to
misappropriate over $550,000 from a retired
schoolteacher. The schoolteacher considered
the manager a close family friend and believed
him to be a successful money manager. Instead
of investing as he represented, the manager
allegedly used the funds for personal and office
expenses, including his residential mortgage,
office rent and staff salaries. The manager
allegedly provided false account statements to
the schoolteacher reflecting nonexistent gains
on her investment.

Ask about others that perform services for
the fund. A hedge fund typically has third parties
who provide various services to the fund, including a
prime broker, an administrator, an outside accountant
that audits the fund’s financial statements, and possibly
a valuation agent. You should consider contacting
these third party service providers to check the
accuracy of information provided to you by the
hedge fund and its manager.
Don’t be afraid to ask questions. You are
entrusting your money to someone else. You should
know where your money is going, who is managing
it, how it is being invested, how you can get it back,
what protections apply to your investment and what
your rights are as an investor.
What protections do I have if I purchase a hedge fund?
Hedge fund investors do not receive all of the federal
and state law protections that commonly apply to
most mutual funds. For example, hedge funds are
not required to provide the same level of disclosure
as you would receive from mutual funds. Without
the disclosure that the securities laws require for most
mutual funds, it can be more difficult to fully evaluate
the terms of an investment in a hedge fund. It may also
be difficult to verify representations you receive from
a hedge fund.

The SEC can take action against a hedge fund or a
manager that defrauds investors, and the SEC has
brought a number of fraud cases involving hedge funds.
For example, a number of these cases involved hedge
fund managers misrepresenting their experience and
the fund’s track record. Other cases involved “Ponzi
schemes,” where returns to existing investors were paid
with funds contributed by new investors. In some of the
cases the SEC has brought, the hedge funds sent phony
account statements to investors to cover up the fact that

Investor Assistance (800) 732-0330 www.investor.gov
5
their money had been stolen. That’s why it is extremely
important to thoroughly check out every aspect of any
hedge fund you might consider as an investment.
Ponzi schemes. In a recent action, SEC v.
Jawed, the SEC alleged that a hedge fund
manager operated a long-running, $37 million
Ponzi scheme. Instead of investing in securities
as he represented to investors, the manager
allegedly used most of his investors’ money to
pay back old investors, to pay himself, to travel
and to create an illusion of achievement by
hiring professionals and educated personnel.
The manager allegedly hid the Ponzi scheme
by creating fake, illiquid investments. With
increasing redemption requests, the manager and
others he hired manufactured a sham buyout of
the funds to make investors think their hedge
fund interests would soon be redeemed.
In another recent action, SEC v. Alleca, the
SEC alleged that a hedge fund manager caused
investor losses of $17 million as he engaged
in a Ponzi scheme to cover-up losses from his
undisclosed trading. The manager created a
fund of hedge funds—a hedge fund that would
be invested in other hedge funds. Instead of
investing in other hedge funds, the manager
allegedly engaged in active securities trading and
incurred substantial losses. To satisfy redemption
requests and conceal losses, the manager created
two additional funds and allegedly siphoned
investors’ money from these funds to satisfy
redemptions on the first fund.
Where can I go for help?
If you have a question or concern about an investment,
or you think you have encountered fraud, please
contact the SEC, FINRA or your state securities
regulator to report the fraud and to get assistance.
U.S. Securities and Exchange Commission
Office of Investor Education and Advocacy
100 F Street, NE
Washington, D.C. 20549-0213
Telephone: (800) 732-0330
Fax: (202) 772-9295
Financial Industry Regulatory Authority (FINRA)
FINRA Complaints and Tips
9509 Key West Avenue
Rockville, Maryland 20850
Telephone: (301) 590-6500
Fax: (866) 397-3290
North American Securities Administrators
Association (NASAA)
750 First Street, NE
Suite 1140
Washington, D.C. 20002
Telephone: (202) 737-0900
Fax: (202) 783-3571

Additional Information
For information about accredited investors, visit
www.sec.gov/answers/accred.htm.
For our Investment Adviser Public Disclosure
(IAPD) website, visit www.adviserinfo.sec.gov.
For FINRA’s BrokerCheck resource, visit www.
finra.org/Investors/ToolsCalculators/BrokerCheck/.
To determine the contact information for your state
securities regulator, visit www.nasaa.org/about-us/
contact-us/contact-your-regulator/.
For FINRA’s investor alert regarding hedge funds,
visit www.finra.org/Investors/ProtectYourself/
InvestorAlerts/MutualFunds/P006028.
For the SEC’s press releases regarding the recent
actions brought against hedge fund managers, visit
www.sec.gov/news/press/2012/2012-192.htm,
www.sec.gov/news/press/2012/2012-206.htm and
www.sec.gov/litigation/litreleases/2012/lr22487.htm.
For more information about Ponzi schemes, visit
www.sec.gov/answers/ponzi.htm.
For our Avoiding Fraud resource, visit www.
investor.gov/investing-basics/avoiding-fraud.
For additional investor educational information,
see the SEC’s website for individual investors,
www.investor.gov.
The Office of Investor Education and Advocacy has provided this information as a service to investors.
It is neither a legal interpretation nor a statement of SEC policy. If you have questions concerning the
meaning or application of a particular law or rule, please consult with an attorney who specializes in
securities law.
SEC Pub. No. 139 (2/13)

OCR text (19,916c · tika · 95% conf)

Investor Assistance (800) 732-0330 www.investor.gov

INVESTOR BULLETIN
Hedge Funds
The SEC’s Office of Investor Education and Advocacy
is issuing this Investor Bulletin to educate individual
investors about hedge funds.

What are hedge funds?
Hedge funds pool investors’ money and invest the
money in an effort to make a positive return. Hedge
funds typically have more flexible investment strategies
than, for example, mutual funds. Many hedge funds
seek to profit in all kinds of markets by using leverage
(in other words, borrowing to increase investment
exposure as well as risk), short-selling and other
speculative investment practices that are not often
used by mutual funds.

You generally must be an accredited investor, which
means having a minimum level of income or assets,
to invest in hedge funds. Typical investors include
institutional investors, such as pension funds and
insurance companies, and wealthy individuals. Hedge
funds are not subject to some of the regulations that are
designed to protect investors. Depending on the amount
of assets in the hedge funds advised by a manager, some
hedge fund managers may not be required to register
or to file public reports with the SEC. Hedge funds,

however, are subject to the same prohibitions against
fraud as are other market participants, and their managers
owe a fiduciary duty to the funds that they manage.

What information should I seek if I am
considering investing in a hedge fund?

n Read a fund’s offering memorandum and
related materials. The hedge fund’s offering
documents and agreements contain important
information about investing in the fund, including
the investment strategies of the fund, whether the
fund is based in the United States or abroad, the risks
of the investment, fees earned by the hedge fund
manager, expenses charged to the hedge fund and the
hedge fund manager’s potential conflicts of interest.
It is important that you read all the documents before
making your decision to invest in a hedge fund. You
should consider consulting an independent financial
advisor before investing in a hedge fund.

n Understand the fund’s investment strategy.
There are a wide variety of hedge funds with many
different investment strategies. Some hedge funds
will be diversified among many strategies, managers

www.investor.gov
http://www.sec.gov/answers/accred.htm

Investor Assistance (800) 732-0330 www.investor.gov

and investments, while others may take highly
concentrated positions or may only use a single
strategy. Make sure you understand the level of risk
involved in the fund’s investment strategies and
ensure that they are suitable to your personal
investing goals, time horizons and risk tolerance.
As with any investment, generally the higher the
potential returns, the higher the risks you must
assume.

n Determine if the fund is using leverage or
other speculative investment techniques.
Leverage is the use of borrowed money to make an
investment. A hedge fund using leverage will typically
invest both the investors’ capital and the borrowed
money to make investments in an effort to increase
the potential returns of the fund. The use of leverage
will magnify both the potential gain and the potential
loss from an investment. The use of leverage can
turn an otherwise conservative investment into an
extremely risky investment. A hedge fund may also
invest in derivatives (such as options and futures) and
use short-selling (selling a security it does not own) to
increase its potential returns, which could likewise
increase the potential gain or loss from an investment.

n Evaluate potential conflicts of interest
disclosed by hedge fund managers. For
example, if your investment adviser recommends
that you invest in a fund that the adviser manages,
there may be a conflict of interest because your
adviser may earn higher fees from your investments
in the hedge fund than the adviser might earn from
other potential investments.

n Understand how a fund’s assets are valued.
Hedge funds may invest in highly illiquid securities
that may be difficult to value. Moreover, many
hedge funds give themselves significant discretion in

valuing illiquid securities. You should understand
a fund’s valuation process and know the extent to
which a fund’s securities are valued by independent
sources. Valuations of fund assets will affect the fees
that the manager charges.

n Understand how a fund’s performance is
determined. Hedge funds do not need to follow any
standard methodology when calculating performance,
and they may invest in securities that are relatively
illiquid and difficult to value. By contrast, federal
securities laws dictate how mutual funds can advertise
their performance by requiring specific ways to
calculate current yield, tax equivalent yield, average
annual total return and after-tax return, as well as
having detailed requirements for the types of disclosure
that must accompany any performance data. If you are
provided with performance data for the hedge fund, ask
whether it reflects cash or assets actually received by the
fund as opposed to the manager’s estimate of the change
in value of fund assets and whether the data includes
deductions for fees.

n Understand any limitations on your right to
redeem your shares. Unlike mutual funds where
you can elect to sell your shares on any given day, hedge
funds typically limit opportunities to redeem, or cash
in, your shares (e.g., monthly, quarterly or annually),
and often impose a “lock-up” period of one year or
more, during which you cannot cash in your shares.
In the time it takes for you to redeem your shares,
their value could diminish and you will not have use
of the money invested in those shares. Furthermore,
hedge funds may charge you a redemption fee before
you are allowed to cash in your shares. Hedge funds
may also have authority to suspend redemptions
under certain circumstances, including in times of
market distress or when their investments are not
able to be quickly or easily liquidated.

www.investor.gov

Investor Assistance (800) 732-0330 www.investor.gov

Disciplinary history. In a recent action,
SEC v. GEI Financial Services, Inc., the SEC
alleged that a hedge fund manager failed to
disclose to his advisory clients that the State
of Illinois had barred him from acting as an
investment adviser.

What questions should I ask the hedge
fund manager before investing?

n Ask about fees and expenses. Fees and expenses
affect your return on investment. Hedge funds
typically charge an annual asset management fee
of 1 percent to 2 percent of assets as well as a
“performance fee” of 20 percent of a hedge fund’s

profit. These fees are typically higher than the fees
charged by a mutual fund. A performance fee could
motivate a hedge fund manager to take greater risks
in the hope of generating a larger return.

Excessive fees. In GEI Financial Services, the
SEC also alleged that the hedge fund manager
withdrew excessive fees from the hedge fund
he managed. The amounts withdrawn allegedly
were based on fee calculations that substantially
differed from what the manager initially told
investors about how the fees were to be calculated.

Tip. A fund of hedge funds is an investment
company that invests in hedge funds—rather than
investing in individual securities. Funds of hedge
funds typically charge a fee for managing your
assets, and some may also include a performance
fee based on profits. These fees are charged in
addition to any fees paid to the underlying hedge
funds and, therefore, you will be paying two layers
of fees. You may wish to read FINRA’s investor
alert, which describes some of the costs and risks
of investing in funds of hedge funds.

n Ask about how a fund’s assets are safe
guarded. A hedge fund’s manager generally has
authority to access and transfer the fund’s assets.
This authority can potentially be misused. To guard
against this, many hedge funds undergo an annual
financial audit by an independent auditor that
includes verification of the existence of the fund
assets. You should inquire about where a fund’s
assets are held (e.g., whether they are held in custodial
accounts at a reputable bank or broker) and whether
an independent third party confirms or otherwise
verifies the existence of the fund’s assets.

www.investor.gov
http://www.adviserinfo.sec.gov/
http://www.sec.gov/cgi-bin/goodbye.cgi?www.nasaa.org/about-us/contact-us/contact-your-regulator/
http://www.sec.gov/cgi-bin/goodbye.cgi?www.nasaa.org/about-us/contact-us/contact-your-regulator/
http://www.adviserinfo.sec.gov/
http://www.sec.gov/cgi-bin/goodbye.cgi?www.finra.org/Investors/ToolsCalculators/BrokerCheck/
http://www.sec.gov/news/press/2012/2012-206.htm
http://www.sec.gov/news/press/2012/2012-206.htm
http://www.sec.gov/cgi-bin/goodbye.cgi?www.finra.org/Investors/ProtectYourself/InvestorAlerts/MutualFunds/P006028
http://www.sec.gov/cgi-bin/goodbye.cgi?www.finra.org/Investors/ProtectYourself/InvestorAlerts/MutualFunds/P006028

Investor Assistance (800) 732-0330 www.investor.gov

Don’t be afraid to ask questions. You are
entrusting your money to someone else. You should
know where your money is going, who is managing
it, how it is being invested, how you can get it back,
what protections apply to your investment and what
your rights are as an investor.

What protections do I have if I purchase a hedge fund?
Hedge fund investors do not receive all of the federal
and state law protections that commonly apply to
most mutual funds. For example, hedge funds are
not required to provide the same level of disclosure
as you would receive from mutual funds. Without
the disclosure that the securities laws require for most
mutual funds, it can be more difficult to fully evaluate
the terms of an investment in a hedge fund. It may also
be difficult to verify representations you receive from
a hedge fund.

www.investor.gov
http://www.sec.gov/answers/ponzi.htm
http://www.sec.gov/answers/ponzi.htm
http://www.sec.gov/litigation/admin/2012/33-9361.pdf
http://www.sec.gov/news/press/2012/2012-206.htm
http://www.sec.gov/news/press/2012/2012-206.htm

Investor Assistance (800) 732-0330 www.investor.gov

their money had been stolen. That’s why it is extremely
important to thoroughly check out every aspect of any
hedge fund you might consider as an investment.

Ponzi schemes. In a recent action, SEC v.
Jawed, the SEC alleged that a hedge fund
manager operated a long-running, $37 million
Ponzi scheme. Instead of investing in securities
as he represented to investors, the manager
allegedly used most of his investors’ money to
pay back old investors, to pay himself, to travel
and to create an illusion of achievement by
hiring professionals and educated personnel.
The manager allegedly hid the Ponzi scheme
by creating fake, illiquid investments. With
increasing redemption requests, the manager and
others he hired manufactured a sham buyout of
the funds to make investors think their hedge
fund interests would soon be redeemed.

In another recent action, SEC v. Alleca, the
SEC alleged that a hedge fund manager caused
investor losses of $17 million as he engaged
in a Ponzi scheme to cover-up losses from his
undisclosed trading. The manager created a
fund of hedge funds—a hedge fund that would
be invested in other hedge funds. Instead of
investing in other hedge funds, the manager
allegedly engaged in active securities trading and
incurred substantial losses. To satisfy redemption
requests and conceal losses, the manager created
two additional funds and allegedly siphoned
investors’ money from these funds to satisfy
redemptions on the first fund.

Where can I go for help?
If you have a question or concern about an investment,
or you think you have encountered fraud, please
contact the SEC, FINRA or your state securities
regulator to report the fraud and to get assistance.

U.S. Securities and Exchange Commission
Office of Investor Education and Advocacy
100 F Street, NE
Washington, D.C. 20549-0213
Telephone: (800) 732-0330
Fax: (202) 772-9295

Financial Industry Regulatory Authority (FINRA)
FINRA Complaints and Tips
9509 Key West Avenue
Rockville, Maryland 20850
Telephone: (301) 590-6500
Fax: (866) 397-3290

North American Securities Administrators
Association (NASAA)
750 First Street, NE
Suite 1140
Washington, D.C. 20002
Telephone: (202) 737-0900
Fax: (202) 783-3571

www.investor.gov
http://www.sec.gov/
http://www.sec.gov/cgi-bin/goodbye.cgi?www.finra.org/Investors/
http://www.sec.gov/cgi-bin/goodbye.cgi?www.nasaa.org
http://www.sec.gov/cgi-bin/goodbye.cgi?www.nasaa.org
http://www.sec.gov/news/press/2012/2012-192.htm
http://www.sec.gov/litigation/litreleases/2012/lr22487.htm
http://www.sec.gov/litigation/litreleases/2012/lr22487.htm

Additional Information

For information about accredited investors, visit
www.sec.gov/answers/accred.htm.

For our Investment Adviser Public Disclosure
(IAPD) website, visit www.adviserinfo.sec.gov.

For FINRA’s BrokerCheck resource, visit www.
finra.org/Investors/ToolsCalculators/BrokerCheck/.

To determine the contact information for your state
securities regulator, visit www.nasaa.org/about-us/
contact-us/contact-your-regulator/.

For FINRA’s investor alert regarding hedge funds,
visit www.finra.org/Investors/ProtectYourself/
InvestorAlerts/MutualFunds/P006028.

For the SEC’s press releases regarding the recent
actions brought against hedge fund managers, visit
www.sec.gov/news/press/2012/2012-192.htm,
www.sec.gov/news/press/2012/2012-206.htm and
www.sec.gov/litigation/litreleases/2012/lr22487.htm.

For more information about Ponzi schemes, visit
www.sec.gov/answers/ponzi.htm.

For our Avoiding Fraud resource, visit www.
investor.gov/investing-basics/avoiding-fraud.

For additional investor educational information,
see the SEC’s website for individual investors,
www.investor.gov.

The Office of Investor Education and Advocacy has provided this information as a service to investors.
It is neither a legal interpretation nor a statement of SEC policy. If you have questions concerning the
meaning or application of a particular law or rule, please consult with an attorney who specializes in
securities law.

SEC Pub. No. 139 (2/13)

http://www.adviserinfo.sec.gov/
http://www.adviserinfo.sec.gov/
http://www.adviserinfo.sec.gov
http://www.sec.gov/cgi-bin/goodbye.cgi?www.finra.org/Investors/ToolsCalculators/BrokerCheck/
http://www.sec.gov/cgi-bin/goodbye.cgi?www.finra.org/Investors/ToolsCalculators/BrokerCheck/
http://www.sec.gov/cgi-bin/goodbye.cgi?www.finra.org/Investors/ToolsCalculators/BrokerCheck/
http://www.sec.gov/cgi-bin/goodbye.cgi?www.nasaa.org/about-us/contact-us/contact-your-regulator/
http://www.sec.gov/cgi-bin/goodbye.cgi?www.nasaa.org/about-us/contact-us/contact-your-regulator/
http://www.sec.gov/cgi-bin/goodbye.cgi?www.nasaa.org/about-us/contact-us/contact-your-regulator/
http://www.sec.gov/cgi-bin/goodbye.cgi?www.nasaa.org/about-us/contact-us/contact-your-regulator/
http://www.sec.gov/cgi-bin/goodbye.cgi?www.finra.org/Investors/ProtectYourself/InvestorAlerts/MutualFunds/P006028
http://www.sec.gov/cgi-bin/goodbye.cgi?www.finra.org/Investors/ProtectYourself/InvestorAlerts/MutualFunds/P006028
http://www.sec.gov/cgi-bin/goodbye.cgi?www.finra.org/Investors/ProtectYourself/InvestorAlerts/MutualFunds/P006028
http://www.sec.gov/news/press/2012/2012-192.htm
http://www.sec.gov/answers/ponzi.htm
http://www.sec.gov/answers/ponzi.htm
http://www.investor.gov/investing-basics/avoiding-fraud
http://www.investor.gov/investing-basics/avoiding-fraud
http://www.investor.gov/investing-basics/avoiding-fraud
http://www.investor.gov
http://www.sec.gov/answers/accred.htm
http://www.sec.gov/answers/accred.htm
http://www.sec.gov/news/press/2012/2012-206.htm
http://www.sec.gov/litigation/litreleases/2012/lr22487.htm