That’s not ‘Research’; That’s a Lexus

MINNEAPOLIS (CN) – A hedge fund manager and his crony bilked his clients of more than $1 million for “phony research expenses and fees,” the SEC claims in court.
     The SEC sued Steven R. Markusen, Jay C. Cope and Archer Advisors LLC on Monday, in Federal Court.
     “From 2008 through 2013, the defendants bilked the funds out of over $1 million in phony research expenses and fees,” the lawsuit states. “They did so as the funds’ deteriorating performance eroded Archer’s legitimate income from managing the funds. Fund investors entrusted Archer with their money, but the defendants exploited that trust. They misappropriated fund assets as investor losses mounted.”
     The 51-page complaint continues: “During that period, Markusen routinely billed the funds for what he claimed were Archer’s out-of-pocket research expenses. Most of those expenses were fake. Markusen knew Archer did not actually incur those expenses, which included fees he claimed Archer paid someone who did not even work for Archer at the time. Overall, Markusen caused the funds to reimburse Archer nearly $500,000 in fake expenses. He claimed most of those fake expenses were ‘research’ fees Archer supposedly paid to Cope. Markusen also caused the funds to reimburse Archer $100,000 for Cope’s salary payments by falsely characterizing them as ‘research’ expenses. He spent these ill-gotten proceeds on luxury items like boarding school tuition, country club dues, and a Lexus.
     “Markusen and Cope also funneled $450,000 in fund assets to Cope by claiming the payments were for ‘research’ Cope did as an independent consultant. Their claim was a fiction. In fact, Cope was an Archer insider and officer whose main duties were helping Markusen find new investors and placing trades. Cope did little, if any, research. The $450,000 in payments he received – typically $10,000 per month – was his salary for working at Archer. It was not for any ‘research’ he performed. Rather than pay Cope’s salary with Archer’s funds, however, Markusen and Cope secretly used fund assets. Without telling investors, they improperly diverted fund trade commissions – known colloquially as ‘soft’ dollars – to Cope by (i) misrepresenting Cope’s relationship with Archer to the brokerage firms that administered the funds’ soft dollars, and (ii) creating false and misleading monthly ‘research’ invoices for the amount of Cope’s salary. They sent the invoices to the funds’ brokerage firms, who, in turn, paid fund soft dollars – $450,000 in total – directly to Cope. Cope paid Markusen a $1,000 monthly kickback from these payments.”
     The 17-count lawsuit seeks disgorgement, damages, fines and an injunction.

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