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June 21, 2004 at 08:00 PM
WASHINGTON (HedgeWorld.com)–It was a prime example of why investors need to conduct proper due diligence before allocating to hedge funds.
A Dallas-based hedge fund company, Integral Investment Management LP, had no problem raising US$71.6 million from approximately 30 investors. Those investors believed that the funds were performing well, but according to the Securities and Exchange Commission, James R. Dickey sold investors a hedge fund strategy that in reality lost 90% of its value.
Integral Principal Conrad Seghers allegedly caused the Integral funds’ values to be overstated by 13% to 77% a month and also misrepresented the funds’ rates of returns. As a result, the SEC charged Messrs. Dickey and Seghers with fraud.
On June 16, the SEC filed a complaint in federal court in Dallas alleging fraud in three funds: Integral Equity LP, Integral Hedging LP and Integral Arbitrage LP. Two years after filing subpoenas and investigating the firm, the SEC seems to be finally moving toward resolving its case against Integral .
The firm’s actions were brought to light when the Art Institute of Chicago filed a lawsuit calling for an accounting of all assets, income and liabilities of the Integral funds. A temporary restraining order was filed against the managers of the Integral Hedging LP and Integral Arbitrage LP Funds in which the museum’s endowment was an investor (see ).
The Art Institute invested US$22.5 million in Integral Arbitrage. The SEC alleges in its complaint that Mr. Seghers said that the Integral Arbitrage fund was not affected by certain brokerage firm errors. The Art Institute presumably was the largest investor in the arbitrage fund, which raised US$33.9 million in assets from approximately 21 investors, according to the SEC.
In an October 2001 letter to investors, Integral admitted losing 90% of its value and suspended investor withdrawals, blaming the 9/11 World Trade Center tragedy. Administrator statements reported such losses for the other two hedge funds but not for the arbitrage fund.
A consultant for the Art Institute originally was told that the loss in the fund was due to margin calls. The SEC in its investigation has uncovered that Messrs. Seghers and Dickey lied to investors saying that they had at various times prominent firms as a prime broker, when in fact the funds never had a prime broker.
