CHICAGO–Strategic Income Fund LLC and more than 50 of its investors filed a lawsuit against Spear, Leeds & Kellogg LP and a subsidiary, First Options of Chicago LLC, alleging that those firms illegally transferred million of dollars in securities and cash from the fund to cover losses on a separate trading account maintained by its manager, Edward Thomas Jung.

Mr. Jung and Hollis M. Lamon organized Strategic Income Fund as a Georgia corporation doing business in Illinois in 1994. They intended that Mr. Jung would manage the fund and would engage on its behalf in options trades, mostly through the Chicago Board Options Exchange, and that a designated brokerage firm, Lamon & Stern, Inc., would serve as the liaison between fund and its investors.

The complaint, filed in the circuit court of Cook County, Ill., July 28, 2003, alleges that by September 1998, Mr. Jung’s trading for his own account had resulted in a debt exceeding US$22 million. That month, defendants seized securities and amounts held for Strategic Income Fund and its members by LIT Clearing Services Inc., a Delaware corporation that was then wholly owned by defendant Spear Leeds & Kellogg, which since has been merged with defendant First Options.

Ren? A. Torrado Jr., a partner in the law firm Corboy & Demetrio, Chicago, represents the plaintiffs. He said in a statement Monday that the actions of Spear Leeds and First Options, “which we expect to prove, provide another shocking example of the type of corporate arrogance that became all too familiar in the late 1990s.”

He added that the actions of the defendants are particularly outrageous because they “seized and sold the plaintiffs’ property even though the defendants had been warned that the property belonged to Strategic Income Fund and its investors [and not to Mr. Jung].”

A spokesman for the defendants said there would be no comment at this time.

This filing represents a shift to state court of a matter that has already been the subject of years of litigation in the federal system. Strategic Income Fund brought an action in federal court, the northern district of Georgia, in December 1998. A year later, the court granted a “motion for judgment on the pleadings”–it concluded that the defendants had not brought a complaint on which it could act under the federal securities law. The U.S. Court of Appeals for the 11th circuit subsequently upheld that decision on appeal.

The Securities and Exchange Commission filed a lawsuit against Mr. Jung and ETJ Partners Ltd., a broker-dealer he controls, in June 2001, in the federal district court for the Northern District of Illinois. The complaint alleged that Mr. Jung had issued a series of false performance reports that overstated both his own prior trading successes and that of Strategic Income Fund and otherwise engaged in a fraudulent scheme at the expense of his investors. In March 2002, that court entered a final judgment order enjoining Mr. Jung from further violations of the antifraud provisions of the federal securities laws.

The U.S. Attorney for the Northern District of Illinois separately brought a criminal case that resulted, in February 2003, in an indictment of Mr. Jung on eight counts of wire fraud and two counts of securities fraudPrevious HedgeWorld Story.

CFaille@HedgeWorld.com