CHICAGO (CN) – A federal judge has frozen the assets of a money manager and his hedge fund advisory firm, whom the SEC accused of lying to potential investors about the startup quantitative hedge fund, the SEC said Wednesday in announcing the unsealing of its federal complaint.
The SEC sued Belal K. Faruki and Neural Markets LLC, and relief defendants Evolution Quantitative 1X Fund and Evolution Quantitative 1X LLC. The complaint was filed under seal on Aug. 10 and unsealed this week.
It states: “The SEC brings this securities law enforcement action to halt an ongoing fraudulent investment scheme run since at least January 2010 to the present by Belal K. Faruki (Faruki) and Neural Markets, LLC (Neural Markets) (collectively, defendants), and to protect investor funds from further dissipation. As part of the scheme, Faruki and Neural Markets presented themselves as managers of a start-up quantitative hedge fund that began trading in 2009. Through their elaborate fraud, defendants defrauded at least one investor (Investor) out of a $1 million and have solicited other investors as well.”
The SEC claims that “Faruki and Neural Markets made the following misrepresentations, among others, to the Investor:
“a. that Faruki, through Neural Markets, created a quantitative hedge fund called the Evolution IX Fund that was actively trading and had a successful track record of positive performance since at least December 2009;
“b. that other wealthy individuals had invested approximately $5 million with defendants and those funds were being traded by defendants, but that the defendants could not reveal the investors’ identities because of confidentiality restrictions;
“c. that defendant Faruki had invested his own money in the Evolution IX Fund and his interests were aligned with the interests of the other supposed investors;
“d. that defendants engaged RSM McGladry, Inc. (McGladry), a reputable auditor, to perform audit services for Neural Markets and the Evolution IX Fund and that McGladry would provide quarterly and annual audited financial statements for the Evolution IX Fund to the Investor; and
“e. that Defendants traded securities for the Evolution IX Fund through prime brokers J.P. Morgan Securities, Inc. (JPMS) and Tradestation Securities, Inc. (Tradestation).”
The complaint continues: “Based on these and other false representations, the Investor sent defendants $1 million in exchange for 10 units of the Evolution IX Fund plus a 1% interest in Neural Markets. Shortly after obtaining the Investor’s money, Faruki, through Neural Markets, transferred the funds to a bank account in the name of Evolution Quantitative IX, LLC (Evolution LLC). Evolution LLC then transferred the funds into accounts at Tradestation Securities, Inc. (Tradestation) in the name of Evolution LLC.
“The Investor had no knowledge of Evolution LLC. Defendants never disclosed to the Investor the existence of Evolution LLC or that his money would be transferred to accounts held by or in the name of Evolution LLC.
“After transferring the Investor’s funds to the Evolution LLC Tradestation accounts, defendants, through at least October 2010, continued to make material misrepresentations and failed to disclose other material facts to the Investor. Defendants falsely represented to the Investor that trading was generating profits for the Evolution IX Fund, when in fact losses were being incurred.”
Faruki, 39, of Aurora, owns 67 percent of Neural Markets, according to the complaint. The SEC complaint adds: “In January 2010, the State of Illinois Securities Department issued a temporary order of prohibition against Faruki prohibiting him from offering or selling securities in Illinois. The Illinois order was based on allegations of fraud in connection with a promissory note offering. The Illinois order was in effect until September 24, 2010, when the parties agreed to an order of dismissal. In 2001, Faruki was subject to a CFTC default order and reparations award for failing to respond to allegations that Faruki fraudulently opened a client account and traded in the account causing client losses.”
The Wall Street Journal reported on its web page today that Faruki denied the allegations. Faruki claimed the investor “is actually a partner in Neural Markets” who was trying to recover losses, according to the Journal, which said that Faruki told it that the investor/partner “has been blackmailing and attempting to extort money from the other partners.”
Faruki also told the Journal that he was not given time to respond to the “incredibly damaging” SEC complaint, and said he was seek an injunction to try to stop the SEC from releasing more information.Quantitative hedge fund managers, or quants, became a hot item on Wall Street before the economic meltdown. They use, or claim to use, sophisticated mathematical algorithms to measure risk, derivatives prices, hedging strategies and otherwise direct investments.