The U. S. Securities and Exchange Commission has charged a Minneapolis-based hedge fund manager, his investment advisory firm, and an accomplice with defrauding hedge fund investors out of more than $1 million. It is this type of continuing securities fraud that keeps securities and investment fraud attorneys busy.
The SEC alleges that as the management fees of investment advisory firm Archer Advisors LLC were shrinking due to the hedge funds’ declining performance, the firm’s owner Steven R. Markusen and an employee Jay C. Cope illegally generated fees at the expense of investors. According to the SEC, Markusen caused the hedge funds to reimburse Archer for fake research reports. Markusen reportedly used much of that money to pay for country club dues, boarding school tuition, and a Lexus, among other luxury items. Markusen also essentially charged fund investors twice for the same fake research. First, he billed the funds directly by falsely claiming that Archer had paid Cope to conduct “research” for the funds. Second, he and Cope improperly diverted “soft dollars” from the hedge funds to Cope for the same purported “research” under the pretense that Cope was an independent consultant. But Cope conducted no third-party research.
According to the SEC, Markusen and Cope disguised Cope’s $10,000 monthly salary payments as research fees because SEC rules and the funds’ terms prohibited Archer employees from being paid a salary from fund assets or receive fund soft dollars for non-research assistance. The SEC alleges that Markusen and Cope traded excessively in the funds’ brokerage accounts in order to generate enough soft dollars to pay Cope’s monthly salary. They created false and misleading invoices for monthly “research” reports that happened to be for the amount of Cope’s salary. The funds’ brokerage firms then paid fund soft dollars directly to Cope for the purported research expenses. Cope gave a monthly kickback of $1,000 to Markusen.
Markusen and Cope also are alleged to have manipulated the price of the thinly-traded stock of CyberOptics Corp. (CYBE), which comprised over 75 percent of the funds’ portfolios and was by far the funds’ largest holding. Knowing that Archer’s trading of CYBE could materially affect the market price of the stock, Markusen and Cope “marked the close” in CYBE on the last trading day of the month at least 28 times. In doing so, they sought to improperly drive up CYBE’s closing price by placing multiple buy orders often seconds before the market closed to artificially pump up the value of the funds’ portfolios, which were valued as of the close of trading on the month’s last trading day. Those valuations were used to calculate the funds’ monthly returns that Archer reported to investors as well as Archer’s monthly management fee, which was a fixed percentage of each portfolio’s value. The higher CYBE closing price at the end of each month enabled Markusen to inflate the funds’ performance and pocket larger management fees.
We cannot ignore the existence of the powerful human characteristic of greed. But in this era when the SEC has been prosecuting securities fraud cases aggressively, leading to numerous prison sentences, we continue be surprised by the brazenness of many fraudsters.