Hedge Fund CEO Arrested in Alleged $105 Million Fraud – Chief Investment Officer

This article was originally published on this site

Philadelphia-based investment manager Brenda Smith, who runs hedge fund Broad Reach Capital, has been arrested on charges that she ran a $105 million investment advisory fraud for the past three years.

Smith, 59, is charged with four counts of wire fraud and one count of securities fraud in the state of New Jersey. Each count can bring a maximum sentence of 20 years in prison. According to court documents, Smith allegedly orchestrated a scheme using her fund Broad Reach Capital from February 2016 to August 2019. Also named as defendants were Broad Reach Capital, Broad Reach Partners, Bristol Advisors LLC, all of which Smith ran, and which the SEC said were “essentially her alter egos.”

She’s accused of lying to investors about the assets and performance of the fund, and falsely stating that she would invest their funds using sophisticated trading strategies that involved highly liquid securities, including those that the fund was supposedly uniquely positioned to use due to its access to the Philadelphia Stock Exchange trading floor.

According to the SEC’s complaint, the vast majority of the funds was moved through the bank accounts of entities Smith controls, and used to make her own personal investments and to repay other investors. It also said she used more than $2 million of the fund’s assets to pay her American Express bills.

The SEC said that to “lull existing investors and solicit additional investments,” Smith provided monthly account statements reflecting high returns and “tear sheets” touting the fund’s supposedly stellar returns.  In these tear sheets, the fund claimed that it had annual returns of over 35% and 33% in 2016 and 2017, respectively, as well as a positive return of 6.07% during the first quarter of 2018, and a 1.76% gain in February 2018.

“In reality, the limited funds invested in the trading strategies declined by over 50% in February 2018,” said the complaint. “And, even when the trading strategies were profitable, there was simply not enough money devoted to them to generate the claimed positive returns for the overall fund.”

When confronted with redemption requests by several large investors in Broad Reach Capital, Smith allegedly failed to honor the redemption requests and lied about the status of their investment and the fund, according to the Justice Department.

“Defendants are covering up a massive shortcoming in the fund caused by the misuse of investor funds and losses generated by the trading strategies,” said the SEC’s complaint. “Putting aside the outlandish and inaccurate claims of 30% plus yearly gains, of the approximately $105 million invested in the fund … the fund still owes investors more than $63 million in principal.”

The SEC, which obtained an emergency asset freeze, said that although investors contributed approximately $105 million to the fund, the high point of the fund’s brokerage and bank accounts, and its purported affiliates, was no more than $31.8 million in December 2016.

The alleged fraud was perpetrated against approximately 40 investors. According to the Justice Department, one of the victims of the alleged fraud made a redemption request for more than $46 million. However, it said Smith failed to pay any portion of the redemption request, and instead gave ever-changing false excuses and explanations for the lack of redemption.

In addition to the maximum 20-year prison sentences for each fraud count, the wire fraud is punishable by a maximum fine of $250,000, or twice the gross amount of gain or loss from the offense, whichever is greater, and the securities fraud count is punishable by a maximum fine of $5 million. The SEC is seeking disgorgement of ill-gotten gains and prejudgment interest, and civil penalties against the defendants.

Related Stories:

SEC Charges Former CFO with Defrauding Thousands of Investors

Kentucky Pension Lawsuit Alleging Hedge Fund Fraud Dismissed

Hedge Fund Manager Gets a 14-Year Prison Sentence for Fraud

Tags: , , ,