Massachusetts Sues Cantella over Hedge Fund Losses

The complaint also outlines testimony from the two fund managers, who were seeking to capitalize on the technology stock boom, describing how they first learned of hedge funds from Cantella and also got permission to offer them.

Cantella’s president at the time, James Freeman, in testimony acknowledged that the firm gave the two approval to launch the hedge fund business, though the firm did request that the two indemnify Cantella from any losses because the assets were not being held at Cantella. (The funds’ prime broker, BankAmerica Securities LLC, wouldn’t allow Cantella to receive compensation for the hedge fund, the complaint notes.)

Cantella officials have been uncooperative with the investigation, at least in part because the firm’s records are incomplete, according to the Massachusetts Secretary’s office. Cantella could not identify any of the investors in the two hedge funds and has failed to provide any documents requested by the Secretary’s office, the complaint shows.

Mr. Freeman told investigators he knew most of the clients were preexisting Cantella clients and was asked if Cantella correctly approved of the outside hedge fund activity, according to the complaint. His response, according to the complaint: “I mean in hindsight, he [compliance officer Denny Suprenant] approved an activity that there was zero benefit and a hundred percent risk. Was this a good business decision? Probably not, definitely not.”

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