Charting Stocks

The SEC is suing a former Minnesota hedge fund manager, alleging that he defrauded investors of almost $16 million.

The lawsuit, which was  filed yesterday in Minneapolis federal court, accuses John Lawton of lying to investors about the performance of his Paramount Partners hedge fund, overstating its balance sheet to hide losses. Lawton, who moved his firm, Crossroad Capital Management, from Wayzata, Minn., to San Francisco last year, has denied the allegations.

The complaint states that Mr. Lawton collected some $10.8 million from 54 investors between 2001 and 2008. He allegedly claimed the fund was returning between 19% and 65% annually, and had “only one losing year, 2004, in which Paramount supposedly lost approximately 5%.” On Dec. 31, Crossroad apparently sent investors documents claiming it managed $17 million.

In fact, according to the SEC, the fund was worth just $5.3 million at the end of last year, and is now worth just $1.3 million. The regulator said Lawton show it financial statements showing the missing $12 million in a brokerage account, but when it contacted the brokerage firm, the firm said the account had been closed in June.

Time to regulate the industry? Hedge fund investors usually receive a one page statement every 3 months. The statement shows the current balance of the account, the balance of the previous quarter and the performance  in percentage terms. Investors generally have no idea what was bought or sold or at what price.

Some 40 large hedge funds have frozen withdrawals. DE Shaw, a NY Based hedge fund which claims to manage $40 billion in capital, recently froze their clients assets after the company was met with 8% of its clients asking for their money back. One has to wonder if DE Shaw, and others like them, won’t give the money back or simply CAN’T. Larry Summers, President Obama’s director of the national economic council, served as a managing director at DE Shaw up until the cabinet nomination.

A $16 million fraud is big and certainly merits attention but is the SEC investigating the $14 BILIION hedge funds?

Related posts:

1. General Motors Ex-CEO Gets $23 Million Pension
2. Jim Cramer Admits to Market Manipulation (Video)
3. Nationalized Citibank Pays $3.5 Million Bonus to Brokers
4. Jefferson County, AL Can’t Make $636 million Debt Payment
5. Larry Summers’ Hedge Fund Freezes Redemptions