SAN FRANCISCO (CN) - The SEC charged two American Pegasus funds and three of their top executives with defrauding investors in a $100 million hedge fund that invested in subprime auto loans. The SEC accused former CEO Benjamin Cui, former portfolio manager Triffany Mok, and former general counsel Charles E. Hall Jr. with self-dealing, misusing clients' assets and failing to disclose conflicts of interest.
American Pegasus LDG, LLC and American Pegasus Investment Management are the institutional defendants in the federal complaint.
All five defendants settled the complaint by agreeing to being barred from the industry, and paying more than $1 million in penalties and restitution, the SEC said.
"The SEC's order instituting administrative proceedings finds that unbeknownst to investors, in mid-2007, Chui used more than $18 million in loans and advances from the Auto Loan Fund to buy the fund's sole supplier of auto loans for himself, Hall, and Mok," the SEC said in a statement announcing the settlement. "This created a pervasive conflict of interest as Chui, Hall, and Mok had a duty to maximize the fund's performance while at the same time had an interest in generating profits for the loan supplier they secretly owned.
"The SEC also found that Chui used millions in cash borrowed from the Auto Loan Fund to prop up other hedge funds he managed. By late 2008, roughly 40 percent of the Auto Loan Fund's assets consisted of 'loans' to the fund managers' related businesses - with fund investors being charged fees based on these undisclosed related-party payments.
"According to the SEC's order, Chui, Hall, and Mok then essentially wiped much of this debt to the fund off the books by selling assets to the fund at a 300 percent mark-up. Chui, with help from Hall and Mok, purchased an auto loan portfolio for $12 million in February 2009 - then sold it to the Auto Loan Fund the same day for more than $38 million. The fraudulently inflated sale was used to erase money owed to the fund for the various related-party transactions."
Chui, of San Carlos, Calif., was fined $175,000 and barred from working for or associating with investment advisers for 5 years.
Hall, of Carlisle, Pa., was fined $100 and barred from associating with investment advisers for 3 years or practicing before the SEC as an attorney for 3 years.
Mok, of Fremont, Calif., was fined $75,000 and barred for 1 year.
The two Pegasus Funds have to cough up $850,000 in improper management fees.