The US Securities and Exchange Commission (SEC) has announced charges against a Houston-based hedge fund manager and his firm for defrauding investors in two hedge funds and steering bloated fees to a brokerage firm CEO, who also is charged in the SEC’s case.
SEC claimed that George R. Jarkesy Jr. worked closely with Thomas Belesis to launch two hedge funds that raised $30m from investors.
The two hedge funds, launched in 2007 and 2009, were called John Thomas Bridge and Opportunity Fund LP I and John Thomas Bridge and Opportunity Fund LP II.
The funds invested in three asset classes such as bridge loans to start-up companies, equity investments principally in microcap companies and life settlement policies.
In order to increase the net asset values of the funds, Jarkesy mispriced certain holdings, so that he could deduct higher management and incentive fees from the funds.
Apart from this, he also wrongly claimed that prominent service providers including KPMG and Deutsche Bank were working with the funds.
SEC New York regional office director Andrew Calamari said, "Jarkesy disregarded the basic standards to which all fund managers are held."
"Not only did he falsify valuations and deceive investors about the value of their holdings, but he bent over backwards to enrich Belesis at the funds’ expense," Calamari added.
Jarkesy used fund assets to hire multiple stock promoters during 2010 and 2011 to create an artificial and unsustainable increase in the price of two microcap stocks in which the funds were heavily invested, according to the SEC’s order.
The US watchdog has launched the administrative proceedings against Jarkesy, John Thomas Capital Management, Belesis, and John Thomas Financial to determine the next course of action including disgorgement and financial penalties.