The Securities and Exchange Commission today announced charges against a Houston-based hedge fund manager and his firm accused of defrauding investors in two hedge funds and steering bloated fees to a brokerage firm CEO who also is charged in the SEC's case.
An investigation by the SEC's Enforcement Division found that George R. Jarkesy Jr. worked closely with Thomas Belesis to launch two hedge funds that raised $30 million from investors. Jarkesy and his firm John Thomas Capital Management (since renamed Patriot28 LLC) inflated valuations of the funds' assets, causing the value of investors' shares to be overstated and his management and incentive fees to be increased, the SEC found. Jarkesy, a frequent media commentator and radio talk show host, also lied to investors about the identity of the funds' auditor and prime broker, the SEC says.
"Jarkesy disregarded the basic standards to which all fund managers are held," Andrew M. Calamari, director of the SEC's New York Regional Office, said in a statement. "Not only did he falsify valuations and deceive investors about the value of their holdings, but he bent over backwards to enrich Belesis at the funds' expense. Belesis in turn exploited the supposed independence of the funds to surreptitiously pull the strings on key decisions."
According to the SEC's order instituting administrative proceedings against Jarkesy, Belesis, and their firms, Jarkesy launched the two hedge funds in 2007 and 2009, and they were called John Thomas Bridge and Opportunity Fund LP I and John Thomas Bridge and Opportunity Fund LP II. The funds invested in three asset classes: bridge loans to startup companies, equity investments principally in microcap companies, and life settlement policies. Jarkesy allegedly mispriced certain holdings to increase the net asset values of the funds, which were the basis for calculating the management and incentive fees that Jarkesy deducted from the funds for himself. Jarkesy also falsely claimed that prominent service providers such as KPMG and Deutsche Bank worked with the funds, the SEC says.
According to the SEC's order, Jarkesy used fund assets to hire multiple stock promoters in 2010 and 2011 to create an artificial and unsustainable spike in the price of two microcap stocks in which the funds were heavily invested. As a result of these efforts, the funds recorded temporary gains in the value of the microcap stocks that Jarkesy used to mask the write-down of other more illiquid holdings of the funds, the SEC says.
According to the SEC's order, Jarkesy violated his fiduciary duties to the funds in multiple instances by providing excessive compensation to Belesis and John Thomas Financial.
The SEC's order charges that Jarkesy and John Thomas Capital Management violated and aided and abetted violations of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5, and violated Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act and Rule 206(4)-8. The SEC's order further charges that Belesis and John Thomas Financial aided and abetted and caused Jarkesy's and John Thomas Capital Management's violations of Sections 206(1), 206(2) and 206(4) of the Advisers Act and Rule 206(4)-8. The administrative proceedings will determine what, if any, remedial action is appropriate in the public interest against Jarkesy, John Thomas Capital Management, Belesis, and John Thomas Financial including disgorgement and financial penalties.
The full news release is available here.
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