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SEC: Hedge Fund Manager Used His Name to Tell a $4 Billion Lie — Enforcement

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The Securities and Exchange Commission charged a New York-based hedge fund manager with investment advisor fraud after he falsely claimed a connection to a family-owned pharmacy chain in the Northeast with which he shared a surname.

The SEC alleges that, since at least 2014, Nicholas Joseph Genovese and his hedge fund Willow Creek Investments raised more than $5.3 million from at least six investors by misrepresenting his prior money-management, securities industry experience and size of operations. 

According to the SEC’s complaint, Genovese falsely stated that he managed $4 billion of the Genovese Drug Store family’s assets. He also falsely stated that his hedge fund’s investment advisor had $30-39 billion of assets under management when, in reality, it appears to have had less than $10 million.

(In 1998, the Genovese Drug Store chain was sold to the Eckerd drugstore chain and renamed.)

The SEC charges that Genovese also falsely stated that his advisory firm had between 42 and 60 employees when, in reality, it had less than 10 employees. He also falsely stated that his hedge fund had investment gains of 30%-40% per year, when it really sustained losses, the SEC says. 

In addition, Genovese also lied about his education and prior work experience, and concealed his criminal past from investors.

“As alleged in our complaint, Nicholas Genovese represented himself as a successful hedge fund manager with a sterling pedigree and track record. In truth, he was a recidivist convicted felon who lost or outright stole most of the money that investors entrusted to him,” Marc Berger, director of the SEC’s New York Regional Office, said in a statement. “In this case, we quickly sought emergency relief to stop Genovese’s ongoing fraud and to prevent the further dissipation of investors’ remaining funds.”

The SEC also alleges that Genovese and his advisory firm Willow Creek Advisors misappropriated investor funds to fund securities trading in Genovese’s personal brokerage account, which sustained more than $8 million of trading losses between 2015 and 2017. He also used these funds to fund his lifestyle by paying approximately $263,000 for ATM cash withdrawals, food, and hotel and transportation charges, including being chauffeured in a Bentley.

According to the SEC’s complaint, Genovese’s fraud appears to be ongoing as evidenced by recent money coming into his account as well as a recent refusal of an investor’s redemption request.

The SEC is seeking a temporary restraining order to freeze Genovese and his hedge fund’s assets and prohibit them from committing further violations of the federal securities laws. The SEC is also seeking a final judgment ordering them to disgorge their ill-gotten gains plus prejudgment interest, and for Genovese and his investment advisory firm to pay financial penalties.

Former President of Ohio Chemical Company Ordered to Pay Over $1 Million

Robert Walton Jr. was ordered to pay more than $1 million for defrauding investors, according to an SEC litigation release.

The SEC’s complaint, filed on May 17, 2017, alleged that Walton, the former president of Ohio-based chemical company Hadsell Chemical Processing, made material misrepresentations to 65 investors in connection with the offer and sale of approximately $12 million in promissory notes between April 2012 and October 2015. According to the SEC, he also failed to register the offering with the SEC.

The complaint also alleged that Walton misrepresented that the investments were guaranteed, that the company had received multimillion-dollar contracts from customers and that that the company was profitable, when none of these statements were true.

Walton was ordered to pay disgorgement in the amount of $506,471, prejudgment interest in the amount of $51,183, and a civil monetary penalty of $506,471.

Forex Trading Company Owner Fined $2 Million

The courts entered a final judgment against Craig Karlis, a former owner of the now defunct, Massachusetts-based Boston Trading and Research (BTR), in a case involving a fraudulent foreign currency trading enterprise.

The SEC filed a civil injunctive action on Oct. 28, 2010 in federal court in Massachusetts against BTR and its principals, Ahmet Devrim Akyil and Craig Karlis. The SEC alleged that they fraudulently raised millions of dollars from hundreds of investors in a foreign currency (forex) trading venture.

According to the SEC, the defendants misappropriated some investor funds for business and personal expenses and lost the vast majority of remaining investor funds through forex trading activity after falsely promising investors that most of their funds would be protected from such trading losses. BTR also provided investors with misleading account statements that did not accurately reflect the firm’s trading activity.

After filing, the case was stayed pending the disposition of related criminal prosecutions of Akyil and Karlis brought by the U.S. attorney in Massachusetts. Karlis pleaded guilty in March 2014 to nine counts of wire fraud, among other charges. In September 2014, Karlis was sentenced to nine years in prison, three years of supervised release, and ordered to pay $4.3 million in restitution to the fraud victims.

In the SEC’s action, Karlis consented to the entry of the final judgment, which orders him to pay a total of nearly $2.2 million, which was deemed satisfied by the restitution order in the related criminal proceedings. Karlis is also permanently barred from associating with any broker or dealer.

The Commission’s case against Akyil is ongoing.

SEC Subpoena Action Against Foundation Selling Chinese Bonds

The SEC filed a subpoena enforcement action against American Bondholders Foundation (ABF), a Tennessee-based limited liability company, for failing to produce documents in response to an investigative subpoena.

According to the filing, the SEC is investigating possible fraud in connection with ABF’s offer and sale of defaulted bonds issued by the Republic of China (the government of China from approximately 1912 to 1949).

According to the filing, ABF has failed to make complete productions of, among other things, documents concerning ABF’s use of investor funds, commissions paid by ABF to third parties, financial and accounting records, and communications with investors.

The SEC’s application seeks an order from the federal district court compelling ABF to produce all documents requested by the subpoena.

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