Among recent enforcement actions on behalf of investors were the Labor Department's settlement for more than $43 million for Madoff victims; SEC charges against two Connecticut-based hedge fund managers and their firms for fraud, and against a Virgin Islands-based advisor, also for fraud; and a censure and fine by FINRA of a firm for numerous reporting failures.
Labor Department Recovers $43 Million for Madoff Victims
Workers and retirees whose employee benefit plans had invested in funds managed by Austin Capital Management may have been shocked to learn that those plans' investment losses were tied to Bernard Madoff's Ponzi scheme.
However, they will receive some restitution in the form of a settlement reached by the Labor Department with Austin Capital Management Ltd. and its general partner, Austin Capital Management GP Corp. Under the terms of the settlement, $34,363,636 will be placed into a settlement fund for plan investors, which, together with an earlier settlement of $9,090,909 from Austin Capital's parent company, KeyCorp, will be distributed to the plans by an independent fiduciary selected by the department.
After an investigation by the Dallas regional office of the Employee Benefits Security Administration (EBSA), the Labor Department said Austin Capital violated ERISA by investing the assets of ERISA-covered plans with Madoff via the Rye Select Broad Market Prime Fund, offered by Tremont Partners and known as the "BMP Fund." The BMP Fund, in turn, was 100% invested with Madoff.
The funds invested in the BMP Fund were the Austin Safe Harbor ERISA Dedicated Fund, Safe Harbor Portable Alpha Offshore Fund One, Safe Harbor Portable Alpha Offshore Fund Two, Safe Harbor Offshore Fund, All Seasons Qualified Purchaser Fund, All Seasons Offshore Fund and the Balanced Offshore Fund.
The two settlements together total $43,454,545. In addition, Austin Capital Management is on the hook for a civil penalty of $4,345,455.
SEC Charges Hedge Fund Managers with Fraud
Two Connecticut-based hedge fund managers and their advisory firm were charged with fraud by the SEC for lying to investors. David Bryson and Bart Gutekunst, co-owners of New Stream Capital, are alleged to have secretly reorganized the fund's capital structure prior to its failure during the financial crisis. They changed the fund to give priority to its largest investor, Gottex Fund Management, in the event of the fund's liquidation, but continued to market the fund as if all investors were of equal standing.
Two others were charged: David Bryson's sister, Tara Bryson, former head of investor relations for the firm, and Richard Pereira, former chief financial officer. The firm's Cayman Islands affiliate was also charged; it allowed the managers to raise almost $50 million and sock away large fees while the fund's investors were left holding the bag when it went bankrupt.
The $750 million hedge fund was focused on illiquid investments in asset-based lending. In March 2008, Gottex threatened to pull its whole investment from the fund—almost $300 million. A few months before this, New Stream had restructured its fund, creating two new feeder funds that wiped out the preferential liquidation rights Gottex had held via the feeder fund through which it had invested. After Gottex's threat, however, Bryson and Gutekunst changed the capital structure to once again favor Gottex.
