SEC Closes Miami Hedge Fund Fraud

by Carla Johnson, Investors Offshore.com

16 March 2005

SEC officials closed Miami-based hedge fund KL Group earlier this month after investigations found a shortfall of at least $80 million and perhaps as much as $300 million, and said this week that they would have been able to act much sooner if new registration rules for hedge funds had been in place.

Acting on the Commission’s request for emergency relief, Judge Kenneth L. Ryskamp of the United States District Court for the Southern District of Florida in West Palm Beach issued temporary restraining orders, asset freezes and other relief against a long list of defendants. According to the SEC's filing, beginning in 1999 and continuing through February 2005 the hedge funds raised over $81 million from at least 250 investors by boasting of consistent above-market returns through trading in aggressive growth stocks. The SEC says that only about $11 million remains of the more than $81 million that investors put into the hedge funds.

Said Ivan Harris, assistant director for enforcement for the SEC's Southeast Region: "To us, it is clear that the fraud would not have continued as long, and it would not have gotten as big because our examiners would have been in there a long time ago." The SEC's new registration rules come into effect in February next year. Hedge fund managers who manage more than $25 million in assets will be required to register and file annual audited performance records with the SEC. Smaller funds will have to register locally.

It is reported, however, that hedge funds facing the prospect of registration are looking around for a way out. The rules contain a number of exemptions, including some for insurance company pooled funds and banks. And under under Section 3 of the 1940 Investment Company Act, hedge funds can choose to implement a two-year lockup period in order to dodge the registration requirement. It has also emerged that the Commodity Futures Trading Commission is in talks with the SEC over exempting those hedge funds which are already registered with the former body from the new requirement to register with the SEC. Many hedge funds are expected just to fold their tents and move offshore.

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