MINNEAPOLIS (CN) - The SEC charged two Florida-based hedge fund managers and Palm Beach Capital Management with funneling more than $1 billion of their customers' money into a Ponzi scheme run by Minnesota-based Thomas Petters. The SEC claims that Bruce F. Prévost and David W. Harrold and their firms pocketed more than $58 million in fees after telling investors of "a phony process for protecting their assets."
Prévost, 50, of Palm Beach Gardens, and Harrold, 51, of Del Ray Beach, falsely assured ... that the flow of their money would be safeguarded by collateral accounts and described a phony process for protecting their assets," the SEC said in a statement announcing the civil complaint.
"When Petters was unable to make payments on investments held by the funds they managed, Prévost, Harrold, and their firms concealed it from investors by concocting sham note exchange transactions with Petters," the SEC says.
Sued along with Prévost and Harrold are their companies, Palm Beach Capital Management LP, and Palm Beach Capital Management LLC.
The SEC accused Petters last year of running a multibillion-dollar Ponzi scheme by claiming he would use investors' money to buy enormous quantities of consumer electronics and sell them to big box retailers. But Petters' "purchase order inventory financing" was a fraud, the SEC says: "There were no inventory transactions."
The SEC claims that Prévost and Harrold lied to their clients about where the Ponzi payments came from - that the money paid out "always came directly from Petters and never came from any retailers."
The SEC claims Prévost and Harrold and Palm Beach Capital Management also "devised with Petters a series of bogus note exchange transactions beginning around February 2008. The Palm Beach Funds on multiple occasions exchanged groups of mature notes that were due to be repaid on or about the date of the exchange for newly-issued notes that were not due to be paid for six months and purported to be collateralized by different merchandise associated with different inventory finance transactions. Instead of receiving cash repayments and then reinvesting that cash in new notes as they had done in the past, Prévost and Harrold simply began exchanging old IOUs for new ones, ultimately swapping the vast majority of notes held by the funds. Meanwhile, they continued to falsely report in monthly communications to investors that the funds were generating the same steady profits they had generated since their inceptions. These overstated rates of return resulted in the payment of excessive fees to Prévost, Harrold, and their firms," according to the SEC.
The SEC seeks disgorgement, civil penalties and injunctions.
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