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Ruling for SEC in Bogus Investment Case

(CN) - A Minnesota investment manager bilked investors for bogus "research expenses" and manipulated trades to reap fees based on artificially inflated earnings, a federal judge ruled.

The Securities and Exchange Commission sued Archer Advisors LLC and its CEO Steven Markusen and officer Jay Cope in Minnesota federal court on Sept. 8, 2014.

U.S. District Judge Michael Davis stated the facts of the case in a ruling issued Tuesday.

After Markusen formed Archer in Wayzata, Minn. in 2002 to manage two private funds, he hired Cope in 2003, but never registered the investment managing firm with the SEC.

The funds allegedly wired more than $680,000 to Archer from 2008 to 2013, to reimburse it for payments that Markusen claimed the firm had made to Cope, Bloomberg Finance LP, and Tom Duxbury, an Archer insider - but Archer actually paid them less than $200,000 and kept the rest.

For example, though Markusen claimed that Archer paid $415,000 to Cope as monthly fees for "research" he did for the funds, Cope in reality did little research, creating no written analysis, studies, or recommendations for Archer, and was only paid $100,000, Davis wrote.

Indeed, from 2009 to 2013, the funds reimbursed Archer an additional $500,000 for out-of-pocket "research" expenses that Markusen knew the firm did not actually pay.

That included $450,000 in fund assets - trade commissions, known as "soft dollars," a percentage of client trade commissions that the brokerage firms credit back to money managers to buy outside research services - sent to Cope, and $50,000 to Duxbury and Bloomberg.

Markusen spent the money on country club dues, a Lexus, and boarding school tuition, the SEC claimed.

On the last trading days of February, March, April, and June 2013, Markusen and Cope marked the close in the funds' largest holding after 2009, CyberOptics Corp., making it close artificially high, so Archer could collect extra monthly management fees from the funds.

Months after the defendants learned that the SEC was investigating them in July 2013, the funds closed in October.

At their peaks, the funds had a combined total of more than $36 million in net assets.

The 17-count complaint alleges violations of the Advisers, Exchange, and Securities Acts. Neither Archer nor Markusen has responded to the allegations.

The court entered default against Archer and Markusen on Jan. 15, 2015.

The SEC moved for default judgment, a permanent injunction, joint and several disgorgement and prejudgment interest of just over $716,000, and an appropriate civil penalty.

Davis granted the motion Tuesday.

"Markusen engaged in a five-year scheme to defraud the funds of illegitimately claimed research expenses," Davis wrote. "Markusen committed a deceptive or manipulative act in furtherance of a scheme to defraud. Specifically, he submitted deceptive and fake reimbursement requests to the funds' administrator. He hid Cope's receipt of the 'research' payments from the funds' auditors and then misrepresented Cope as an independent research consultant to the funds' soft-dollar broker. Markusen also altered fund documents to omit reference to Cope's role as an Archer officer and employee and to obscure Cope's actual duties. Finally, Markusen day-traded the funds' soft-dollar accounts so that he could secretly divert the soft dollars, which were fund assets, to improperly pay Cope and other Archer expenses."

Markuson also "failed to tell investors that the Funds were paying Cope's salary and, thus, were being double charged for it," the ruling states. "He also failed to disclose that he received kickbacks from the soft-dollar payments to Cope."

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