BOSTON (HedgeWorld.com)–The Secretary of Massachusetts, William F. Galvin, sued Cantella Securities Inc., a Boston-based securities firm, over alleged improper sales of hedge funds to unsophisticated investors that resulted in losses totaling US$3.5 million.
The hedge fund losses allegedly wiped out the retirement savings for some of the 41 Cantella customers involved, according to the complaint filed by the securities division of the Massachusetts Secretary’s office. The complaint states that more than 60% of the fund investors were unsophisticated, unaccredited investors, the general qualifier needed to invest in an unregistered hedge fund.
The suit concerns two hedge funds, Hercules Hedgehog Fund and Agrippa Fund, which allegedly were managed and sold by two inexperienced registered representatives with the approval of Cantella. The two managers of the funds, James Pangione and Timothy Rassias, were named as defendants in a Massachusetts-filed suit in August concerning the Hercules Hedgehog fund and their firm Hercules Capital Management, Worcester, Mass. .
Cantella executives declined comment.
Mr. Galvin’s office seeks payment by Cantella of an administrative fine, recision of losses to customers of the two funds and a cease and desist order to prevent further violations, the complaint shows. The suit arises from alleged violations of the state’s Uniform Securities Act and related regulations.
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.”