BLOOMFIELD HILLS, Mich. (HedgeWorld.com)–Ryan J. Fontaine was charged with fraud by the Securities and Exchange Commission after shares in the hedge fund he created were offered over the Internet.
The commission’s complaint names Mr. Fontaine and Simpleton Holdings Corp. (a.k.a. Signature Investments Hedge Fund) as defendants in the case. A 22-year-old college student living at home with his parents, Mr. Fontaine allegedly offered shares of Signature Investments Hedge Fund from at least July through Oct. 22.
The offering allegedly made false and misleading statements about the hedge fund’s track record, the amount of assets Signature managed and Signature’s purported affiliation with service providers. Mr. Fontaine used a web site, a prospectus and emails to drum up cash from investors and prospective investors.
According to the SEC’s complaint, investors were told that Signature averaged over a 39.5% annual return over its 13-year history, including returns of over 21% a year during the bear market of the last two years. He also allegedly claimed that Signature had US$250 million under management, that Salomon Smith Barney was the subadviser to the firm and KPMG LLP was its auditor and that investor’s funds were being held in trust at the Delaware Charter Guarantee & Trust Co.
In Signature’s prospectus, investors found Fontaine Holdings listed as Signature’s investment adviser and Matthew Backaitis, a high school friend of Mr. Fontaine, named portfolio manager and chief analyst. Mr. Backaitis never provided any portfolio management or analytical services to Signature.
The SEC also asserts in its complaint that during its investigation, Mr. Fontaine continued to make fraudulent statements to existing and prospective investors. The commission said that on Oct. 17, its staff informed the defendant that fraud charges were being brought against him. But on Oct. 22, Mr. Fontaine continued to solicit additional investments from one of its existing investors and told the investor that the commission staff’s only concern with Signature’s offering was that the firm used the term “hedge fund” in its offering materials and that he didn’t expect to be charged by the commission.
The SEC applied for a preliminary injunction, expedited discovery process and other interim relief for investors that were sold at least US$29,300 worth of Signature shares. Mr. Fontaine and Signature have consented to the requested interim relief and to transferring funds to the court in two Signature accounts for return to investors.
Recently, the SEC filed two other fraud cases against small, unregistered hedge funds and their managers. Midwest House Asset Management and Sierra Equity Partners found themselves being investigated by the SEC earlier this year. In June, the SEC alleged that Paul J. House and Brandon R. Moore raised US$2.9 million from at least 60 investors through an unregistered offering of units in the House Edge fund by making false and misleading statements about the fund’s track record and the managers’ backgrounds in offering materials and on the hedge fund’s web site (Previous HedgeWorld Story).
In October, the SEC started administrative proceedings against hedge fund Sierra Equity Partners LP and its founder John Christopher McCamey. The SEC’s division of enforcement said that Mr. McCamey established a fraudulent, unregistered offering of securities in a hedge fund in November and December of 2001 (Previous HedgeWorld Story)