On October 14, 2010, the Securities and Exchange Commission charged two Florida-based hedge fund managers and their firms with fraudulently funneling more than a billion dollars of investor money into a Ponzi scheme operated by Minnesota businessman Thomas Petters.
The SEC has alleged that Bruce F. Prévost of Palm Beach Gardens, Florida and David W. Harrold of Delray Beach, Florida falsely represented that investors’ money would be safeguarded by collateral accounts. When Petters was unable to make payments on investments held by the funds they managed, Prévost, Harrold, and their firms concealed it from investors by concocting sham note exchange transactions with Petters, who the SEC charged last year along with an Illinois-based hedge fund manager who also facilitated the scheme. And while actively concealing Petters’s fraud, Prévost and Harrold falsely reported to investors that their investments were generating steady profits. These overstated rates of return resulted in the payment of excessive fees to Prévost, Harrold, and their firms.
So, rather than guarding their clients’s money, Prévost and Harrold actually facilitated Tom Petters’s fraudulent scheme. Investors ultimately lost more than one billion dollars, while Prévost and Harrold pocketed millions of dollars in fees.
The SEC’s complaint against Prévost and Harrold and their firms Palm Beach Capital Management LP and Palm Beach Capital Management LLC invested more than $1 billion in hedge fund assets with Petters between 2004 and 2008 while collecting more than $58 million in fees. Petters promised investors that their money would be used to finance the purchase of consumer electronics by vendors who then re-sold the merchandise to such large retailers, such as Wal-Mart and Costco. In reality, Petters was operating a Ponzi scheme. There were no inventory transactions. Petters sold promissory notes to feeder funds like those controlled by Prévost, Harrold, and their firms, and Petters used some of the note proceeds to pay returns to earlier investors, diverting the rest of the cash for his own use.