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Industry Spotlight > Broker Dealers

Broker Complaint Filed by Massachusetts

By Staff Writer

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BOSTON (HedgeWorld.com)–Massachusetts’ securities regulator filed an administrative complaint against a broker it alleges fraudulently was selling shares of a hedge fund.

The broker, Gerald F. Stonehouse, allegedly broke the rules of his employer, Wachovia Securities, Norwell, Mass., to sell shares of Futronix Futures Fund through a company Mr. Stonehouse had founded for that purpose, Affirmed LLC.

Mr. Stonehouse couldn’t be reached for comment.

Massachusetts’ Securities Division, which operates under Secretary of the Commonwealth William F. Galvin, already filed charges against the managers of the Futronix Fund as part of a sweep involving the hedge fund industry. In August, Massachusetts sued Michael F. Payne, principal of a Bahamas-domiciled company also called Futronix that operated out of Reston, Va., according to the state’s complaint against the company .

The recent complaint seeks to fine Mr. Stonehouse an unspecified amount, to deny him his registration as a broker and to prevent him from selling any more shares. Massachusetts noted in a statement that US$350,000 was invested in the fund through Mr. Stonehouse.

The complaint alleges he sold shares of the Futronix fund without Wachovia’s approval and introduced his clients to losses almost immediately. In June 2002, shortly after Mr. Stonehouse’s first three clients invested, about 70% of the total invested was lost, “in what was described as a keypunch error by [Mr.] Payne,” the complaint states.

Despite the initial losses, Mr. Stonehouse referred additional clients to the fund, with each investor losing about 85% of its investments, the complaint states. The company he founded to sell shares of Futronix, Affirmed LLC, was paid 2% to place money in the fund, though it wasn’t registered as a securities firm in Massachusetts, according to the complaint.

Wachovia learned of his actions through a complaint letter that was mailed to Mr. Stonehouse’s office at Wachovia, even though Mr. Stonehouse had tried to conduct Futronix-related business outside of Wachovia. Wachovia terminated his employment shortly after, according to a statement from Mr. Galvin’s office.

In testimony, Mr. Stonehouse described his decision to participate in the offering and sale of the fund: “I knew it was against Wachovia’s policy. And I know this sounds totally absurd, but I didn’t know I was breaking the law by doing it,” the complaint says.

But later, after a request for clarification about his knowledge of the legality of his selling interest in the Futronix fund, the complaint notes that he said: “You know I must have known in my heart of hearts, I must have. When I did it, I guess I just wasn’t thinking. I wasn’t thinking.”

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