HARTFORD (CN) - New Stream Capital's hedge fund fraud cost investors $170 million when the fund failed after its directors lied to investors to keep "their management fees flowing," the SEC claims in court.
According to the SEC's federal complaint: "This case is about a hedge fund fraud that cost investors millions of dollars when the hedge fund failed in the fall of 2008, after the Defendants perpetrated a scheme to mislead investors about the capital structure of the hedge fund in order to keep the hedge fund afloat and their management fees flowing well into 2008.
"New Stream was an unregistered investment adviser in Ridgefield, Connecticut that at one time managed a $750-plus million hedge fund focused on illiquid investments in asset-based lending. In March 2008, David Bryson and Gutekunst, New Stream's lead principals and co-owners, set in motion a scheme to secretly revise the hedge fund's capital structure to placate their largest investor, Gottex Fund Management Ltd. ('Gottex'), by giving Gottex and certain other preferred offshore investors priority over all the other investors in the event of a liquidation. Gottex had threatened to pull its money out of the New Stream hedge fund because a wholesale restructuring of the fund just a few months earlier had created two new feeder funds and granted equal liquidation rights to all of the investors, thereby eliminating the preferential liquidation rights previously enjoyed by the feeder fund through which Gottex had invested. Gottex's investment totaled nearly $300 million.
"At the direction of David Bryson and Gutekunst, New Stream's marketing department, led by Tara Bryson, fraudulently raised nearly $50 million in new investor funds after March 2008 by continuing to use the now obsolete - and thus materially misleading - pre-March 2008 solicitation materials and without disclosing the March 2008 revisions to the capital structure to the new investors whose interests were materially impaired by those changes. In addition, Pereira, New Stream's CFO, falsified the hedge fund's operative financial statements to conceal the March 2008 revisions to the capital structure. Not only did the Defendants deceive new investors about the fund's true capital structure, but they also failed to tell existing investors in the two new feeder funds that, contrary to the representations originally made to them, New Stream had subordinated their positions in the capital structure.
"Disclosure of the March 2008 changes to the capital structure would have made it far more difficult to continue to raise money through the new feeder funds and would have spurred redemptions from existing investors in the new feeder funds. As such, disclosure of the March 2008 changes would have adversely affected the defendants' own pecuniary interests by, among other things, jeopardizing the increased cash flow from a new, lucrative fee structure that they had implemented in the fall of 2007.
"By the end of September 2008, as the U.S. financial crisis worsened, the New Stream hedge fund was facing $545 million in redemption requests, causing it to suspend further redemptions and cease raising new funds. After several attempts at restructuring failed, New Stream and affiliated funds filed Chapter 11 bankruptcy petitions in March 2011. Based on current estimates, the defrauded investors, whose bankruptcy claims totaled approximately $182 million, are expected to receive approximately five cents on the dollar - substantially less than half the amount that Gottex and other investors in its preferred class are expected to receive."
The SEC sued New Stream Capital LLC; New Stream Capital (Cayman) Ltd.; David A. Bryson, 44, of Ridgefield; Bart C. Gutekunst, 61, of Weston, Conn.; Richard Pereira, 40, of Ridgefield; and Tara Bryson, 38, of West Suffield, Conn., who is David Bryson's sister. "She currently works as a goat farmer," the SEC says.
It seeks restitution, penalties and an injunction telling the defendants not to do such a thing again.
Gottex is not a party to the complaint.
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