CHICAGO (HedgeWorld.com)–The case of a Lake Forest, Illinois, hedge fund that got swindled by group of alleged fraudsters took a strange twist on March 2 when the Securities and Exchange Commission sued the hedge fund and its principal, Sharon E. Vaughn, in federal district court, alleging she defrauded her own investors by getting duped herself.
The SEC's complaint restated much of what the U.S. Attorney's Office had alleged in November, when it accused Richard E. Warren, David L. Myatt and Frank L. Cowles of defrauding Ms. Vaughn and her investment firm, Directors Financial Group Ltd. The three men promoted what they said was a risk-free investment that could yield profits of 10% per week. After giving the men $25 million–$23 million from a hedge fund Ms. Vaughn started in 2003 called Directors Performance Fund LLC, and $2 million of her own money–that money was transferred several times and Ms. Vaughn eventually lost control of it.
Facing an SEC audit and questions about where the money was, Ms. Vaughn went to the U.S. Secret Service with her story. For several weeks she participated in secretly tape-recorded conversations with all three men, conversations that eventually led to wire fraud charges being filed against them.
A federal grand jury on March 1 handed down an 11-count wire fraud indictment against Mr. Warren. Mr. Myatt's case is pending, but an indictment has not yet been handed down. The U.S. Attorney's Office filed a motion on March 1 to dismiss charges against Mr. Cowles.
According to the SEC, after Messrs. Warren, Myatt and Cowles were arrested, an unidentified fourth person involved in the scheme wired $21.6 million to a Nevada company called Akela Capital Inc., which Mr. Myatt formed with Ms. Vaughn in order to invest in the trading scheme.
But SEC officials apparently were concerned enough about how Ms. Vaughn managed to lose control of the assets of her 22 hedge fund investors that they decided to file charges of their own–against her.
In its complaint the SEC charged that Ms. Vaughn did not properly investigate the three men's investment scheme, their individual backgrounds or whether the investment was even legitimate. The complaint alleged Ms. Vaughn and the three men entered into what the SEC called a "profit sharing agreement." It was unclear exactly what form that agreement took, and whether it was, in fact, a performance fee.
The complaint further alleged that Ms. Vaughn and Directors Financial redeemed four principals in the Directors Performance fund, even though control of the assets had been lost, and that that move essentially left the hedge fund unable to meet further redemption requests. This was not disclosed to other investors, according to the SEC.
Federal District Judge Charles P. Kocoras ruled on the SEC's complaint March 2. The order required Ms. Vaughn and Directors Financial to pay $808,820.07 in disgorgement and interest and froze the fund's remaining assets, contained in the Akela Capital account. That, according to the SEC, allowed for Directors Financial investors to receive all their principal back.
According to a news release from the SEC, Ms. Vaughn and Directors Financial agreed to the judgment without admitting or denying the allegations.
