CLEVELAND (HedgeWorld.com)–Another Buckeye State investment firm has caught the eye of the Securities and Exchange Commission, which filed a complaint in U.S. District Court against David A. Dadante, 52, alleging seven counts of securities fraud in relation to the IPOF Fund, managed by Mr. Dadante since 1999.

Mr. Dadante, according to the SEC complaint, ran the $50 million IPOF Fund as a Ponzi scheme, redeeming old investors with the assets of new investors while spending millions for his own purposes. The complaint also alleges that he misrepresented the fund’s investment strategy and acted as an unregistered investment adviser.

In early December, former investors of IPOF filed a suit charging Mr. Dadante with stealing money from the fund, falsifying account statements and preparing fake securities-trading confirmation slips, while paying himself approximately $900,000 in 2005.

Neither that suit nor the SEC complaint specifies how much money investors lost to Mr. Dadante’s alleged improprieties, but following the investors’ lawsuit a federal judge froze $24 million in assets. IPOF has paid out approximately $25 million to investors, according to the firm, and Mark Dottore of Cleveland-based Dottore Companies LLC was appointed by the court as a trustee to oversee the fund while the lawsuit plays out.

On a third front, the U.S. Attorney’s Office has launched a criminal investigation of Mr. Dadante in conjunction with the Federal Bureau of Investigation, according to Assistant U.S. Attorney Bill Edwards.

Neither Mr. Dadante nor his lawyer, Mark Stanton, could be reached for comment Thursday [April 20].

The Euclid, Ohio-based IPOF fund was established by Mr. Dadante in 1999, and all told raised approximately $50 million from at least 110 investors in five states, most of whom reside in or around Cleveland; investors included a restaurateur family, a Teamsters union president and the owners of a construction business. Mr. Dadante offered limited partnership interests in the fund, and initially presented the investment strategy as buying and selling stocks during companies’ initial public offerings. Later, he told IPOF investors that he had changed the fund’s strategy to focus on large-block equity day trading.

Mr. Dadante claimed historical returns of 26% to 32% in 1999 and 2000, respectively, according to the SEC complaint. In solicitation materials sent to potential investors he guaranteed returns of 10% to 20% per year, and he is alleged to have presented investors with phony statements showing returns along those lines. Mr. Dadante also claimed a relationship with Goldman Sachs, where investors’ assets were supposedly pooled and a Goldman vice chairman assisted in the management of IPOF’s investment strategies.

In reality, the SEC complaint alleged, IPOF pursued neither IPO stock offerings nor large-block equity day trading; there was no business relationship with Goldman Sachs and no profits to speak of in 1999, 2000, or any other year.

The one investment IPOF was known to have made, according to the SEC complaint and the investors’ suit, was in Innotrac Corp., a small-cap, Duluth, Ga.-based consulting, marketing and telecommunications company. Mr. Dadante allegedly invested $30 million of IPOF’s assets in Innotrac stock, which was not sold in an initial public offering and was traded on the Nasdaq over-the-counter market. Nor was the position, which represents approximately 33 percent of all Innotrac shares, taken in a large-block equity day-trading transaction–the SEC complaint alleges that Mr. Dadante accumulated the stock over a long period of time.

Additionally, Mr. Dadante failed to register the IPOF with the SEC as an investment company, and he never held an investment adviser or securities sales license in Ohio.

The SEC is seeking permanent injunctions and disgorgement of any investor money that remains in the IPOF Fund or that Mr. Dadante may have pocketed, in addition to prejudgment interest and civil penalties against Mr. Dadante.

The defendant, who resides in Gate Mills, Ohio, is yet to have his day in court regarding the IPOF situation, but court records show that he has strayed in the past. State and federal tax liens have been filed against Mr. Dadante for the nonpayment of taxes, totaling approximately $150,000 due to the IRS, according to the Cleveland Plain Dealer; most of the money was repaid in 2002.

The SEC is quickly becoming familiar with the courtrooms of Ohio. In late February, the Commission filed charges against Jesse Bonner of Mantua, Ohio, who raised $1.5 million for a hedge fund. Like Mr. Dadante, Mr. Bonner was not registered to sell securities in Ohio, and is also alleged to have appropriated investors’ assets for his personal use.

Last October, the SEC filed a complaint against an Ashland, Ohio-based stockbroker named Gregory A. Applegate, who is alleged to have duped 140 investors into investing $5.8 million with his hedge fund. Assets instead went toward running a coffee shop, paying bills, and donations to the Ashland Community Art Center–which was headed by Mr. Applegate’s spouse.

And in June 2005, Columbus, Ohio hedge fund firm MDL Capital Management Inc. was sued by Ohio Attorney General Jim Petro, who charged MDL’s management with fraud, conspiracy, breach of fiduciary duty and breach of contract following a $215 million loss by the Ohio Bureau of Workers’ Compensation, which was invested in the MDL Active Duration Fund. Mark D. Lay, chief executive of MDL, and other executives are alleged to have lied about the fund’s use of leverage and the fact that there were no other investors in the vehicle.

JBunge@HedgeWorld.com

Contact Bob Keane with questions or comments at bkeane@investmentadvisor.com.