CHICAGO (HedgeWorld.com)–The case of a Lake Forest, Illinois, hedge fund that got swindled by group of alleged fraudsters took a strange twist on March 2 when the Securities and Exchange Commission sued the hedge fund and its principal, Sharon E. Vaughn, in federal district court, alleging she defrauded her own investors by getting duped herself.
The SEC’s complaint restated much of what the U.S. Attorney’s Office had alleged in November, when it accused Richard E. Warren, David L. Myatt and Frank L. Cowles of defrauding Ms. Vaughn and her investment firm, Directors Financial Group Ltd. The three men promoted what they said was a risk-free investment that could yield profits of 10% per week. After giving the men $25 million–$23 million from a hedge fund Ms. Vaughn started in 2003 called Directors Performance Fund LLC, and $2 million of her own money–that money was transferred several times and Ms. Vaughn eventually lost control of it.
Facing an SEC audit and questions about where the money was, Ms. Vaughn went to the U.S. Secret Service with her story. For several weeks she participated in secretly tape-recorded conversations with all three men, conversations that eventually led to wire fraud charges being filed against them.
A federal grand jury on March 1 handed down an 11-count wire fraud indictment against Mr. Warren. Mr. Myatt’s case is pending, but an indictment has not yet been handed down. The U.S. Attorney’s Office filed a motion on March 1 to dismiss charges against Mr. Cowles.
According to the SEC, after Messrs. Warren, Myatt and Cowles were arrested, an unidentified fourth person involved in the scheme wired $21.6 million to a Nevada company called Akela Capital Inc., which Mr. Myatt formed with Ms. Vaughn in order to invest in the trading scheme.
But SEC officials apparently were concerned enough about how Ms. Vaughn managed to lose control of the assets of her 22 hedge fund investors that they decided to file charges of their own–against her.
In its complaint the SEC charged that Ms. Vaughn did not properly investigate the three men’s investment scheme, their individual backgrounds or whether the investment was even legitimate. The complaint alleged Ms. Vaughn and the three men entered into what the SEC called a “profit sharing agreement.” It was unclear exactly what form that agreement took, and whether it was, in fact, a performance fee.
The complaint further alleged that Ms. Vaughn and Directors Financial redeemed four principals in the Directors Performance fund, even though control of the assets had been lost, and that that move essentially left the hedge fund unable to meet further redemption requests. This was not disclosed to other investors, according to the SEC.
Federal District Judge Charles P. Kocoras ruled on the SEC’s complaint March 2. The order required Ms. Vaughn and Directors Financial to pay $808,820.07 in disgorgement and interest and froze the fund’s remaining assets, contained in the Akela Capital account. That, according to the SEC, allowed for Directors Financial investors to receive all their principal back.
According to a news release from the SEC, Ms. Vaughn and Directors Financial agreed to the judgment without admitting or denying the allegations.
Ms. Vaughn declined to answer questions about the SEC complaint or about her agreeing with the judgment. She said only that all the investors in the Directors Financial Group hedge fund would soon receive all of their money back. “Thank God I went to the Department of Justice and the Secret Service,” she said.
The case has some fantastic elements that would make for a good, taut thriller.
The so-called trading program scheme pitched to Ms. Vaughn by Mr. Myatt involved investing in bonds and collateral with a firm called American Trade Industries Inc., run by Mr. Warren, according to the original Department of Justice complaint. Mr. Warren, who had been sued by the SEC in 1997 over what the commission said was a phony debenture investment operation, told Ms. Vaughn her money–$20 million at the time–would have to be moved to Europe since that was where the trading would take place. She agreed to the move after receiving assurance that she would retain control of the money.
The money was wired to a bank in Milan. A short time later, Mr. Warren told Ms. Vaughn the money would have to be moved again because the bank was not cooperating. Ms. Vaughn signed a document giving a man named Bino Giovanni Hogan authorization to move the funds. Ms. Vaughn received a copy of a letter from the second bank, addressed to Akela and Mr. Hogan, confirming the transfer. Soon after that, Mr. Warren told Ms. Vaughn the money was going to be moved yet again, this time to HSBC Bank in Frankfurt, Germany.
About this same time, Ms. Vaughn wired an additional $5 million, ostensibly to take advantage of another trading opportunity offered by Mr. Warren, this one involving “substantial profits” and someone Mr. Warren referred to as a “Fed Administrator.” According to the DOJ complaint, after the investment was made the adviser was to get her $25 million back immediately, plus at the end of 12 months a $10 million profit and another “substantial” profit on top of that.
The Fed Administrator would play a major role, according to the DOJ complaint. He would send important documents for signature, review them and declare them unsuitable, a declaration that resulted in Mr. Warren advising of further delays in getting the advisor’s $25 million transferred back to Chicago. But according to the Federal Reserve itself, the Fed plays no role in private investment deals. In fact, in 2002 the Fed posted a letter on its Web site warning of “Prime Bank” and other financial fraud schemes purporting to be run through or in conjunction with the Fed. In the letter, the Fed said “?? 1/2 the Federal Reserve does not guarantee or enter into transactions with individuals. . . .”
Ms. Vaughn didn’t know this, but was nervous anyway. She started asking for copies of bank statements from HSBC, but never received them. She tried faxing the second bank, but was told no information could be released to her. She flashed back to documents she signed giving Mr. Hogan authorization to move the money. Around this same time the SEC began an audit of Ms. Vaughn’s business. She called Mr. Myatt and told him she and the SEC were “extremely concerned” with her inability to produce a current bank statement or to account for the funds. She then demanded her money back, setting off a cycle of promises, delays and explanations by Messrs. Warren, Myatt and Cowles, that never resulted in any statements or money being delivered to Ms. Vaughn.
Eventually she went to the Secret Service. Meanwhile the SEC continued its investigation, which culminated in the civil charges.
Contact Bob Keane with questions or comments at firstname.lastname@example.org.