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Saturday, May 18, 2024 | Back issues
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From Day Trader to Ponzi Man, SEC Says

HOUSTON (CN) - A hedge fund manager used phony references and false profit reports to raise $4.7 million from investors, then lost all but $1,000 of it through bad trades, the SEC claims in Federal Court. Stephen Kim, a former day trader, controlled the hedge fund through his company Spyglass Management, and raised the money from 2004 to 2006, primarily from investors in Houston, by promising to invest in Collaterized Mortgage Options, according to the complaint.

"Kim's entire trading strategy was based on the premise that interest rates, which were at historic lows, would rise," the SEC says. Kim claimed risks would be managed by a "dynamic hedging strategy" that would protect the fund from a significant drop in interest rates.

But it took only a few months for Kim's "highly leveraged repurchase agreements" to lose $2.3 million, the SEC says. So Kim jiggered up false forms for investors and the IRS for the 2004 tax year, the SEC says.

"In 2005, Spyglass Management began making Ponzi payments to its investors in order to obtain additional funds and to lure capital from new investors," according to the complaint.

"In offering materials and personal sales pitches for the fund, Kim portrayed himself as a successful businessman who had gained significant personal wealth through personal securities trading," the SEC says. "In reality, Kim was simply a day trader who lost money."

Kim falsely claimed to have a finance degree from the University of Texas, and failed to disclose that a brokerage firm had fired him for unauthorized trading, the SEC adds.

He eventually just stole from his clients, according to the complaint: "In 2006 ... Kim misappropriated approximately $1.5 million of the fund's remaining assets to repay several outstanding personal obligations," the SEC says.

Later that year, Kim abandoned his company and tried to recoup his losses through other ventures, according to the complaint: "In November 2006, after the investors became aware of Kim's other business ventures and the dearth of information concerning the fund, Kim had Spyglass Management produce a false statement valuing the fund at $1.9 million, when in reality the fund only had approximately $1,000."

The SEC sued Kim and Spyglass Management for violations of the Securities Act, the Exchange Act and the Advisers Act. It seeks an injunction and penalties.

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