Monthly Archives: July 2012

Recent Enforcement Actions Illustrate the Need for Good Recordkeeping

SEC v. Gold Standard Mining Corp.

SEC v. Orthofix International N.V.

In the Matter of Altamont Global Partners

Since the end of June, there have been three enforcement actions dealing with inadequate or improper accounting methods that did not follow generally accepted accounting practices (GAAP). Two enforcements were brought by the SEC and one by the NFA. Gold Standard Mining Corp. and Altamont Global Partners involve making false statements regarding the value of assets. Orthofix deals with the failure to adopt and follow appropriate internal procedures to ensure proper accounting. We are providing an overview of these actions and some of our thoughts below.

SEC v. Gold Standard Mining Corp.

  • Gold Mining Corp. made false and misleading statements in filings with the SEC regarding the acquisition, operations, and assets of a Russian subsidiary.
  • Gold Mining Corp. filed fraudulent financial statements from 2009-2011 that did not follow GAAP. Revenues were not reported accurately, and assets were grossly inflated. For example, one asset, a hotel, was valued as $3MM per room.
  • Gold Mining Corp. also failed to disclose a profit sharing agreement with the former owner of the Russian subsidiary.

The complaint can be found here.

SEC v. Orthofix International N.V.

  • Wholly owned Mexican subsidiary of Orthofix, Promeca, paid $317,000 in bribes to Mexican officials in order to obtain sales contracts from the Mexican government.
  • Promeca employees referred to the bribes as “chocolates” and fraudulently recorded the transactions as cash advances or promotional and training expenses.
  • Prior to the discovery of the bribery scheme, Orthofix did not have an effective Foreign Corrupt Practices Act compliance manual or training regime in place. The only anti-bribery materials given to Promeca were in English only.
  • Orthofix did not have an adequate internal auditing system in place and failed to conform with GAAP.

The complaint can be found here.

In the Matter of Altamont Global Partners

  • Funds managed by Altamont made loans to Altamont in violation of NFA Compliance Rule 2-45 which prohibits loans by commodity pools to its CPO/affiliated persons or entities.
  • Loan proceeds were used to pay operating expenses or paid directly to employees of Altamont.
  • Altamont falsified quarterly statements by hiding losses and inflating funds’ net asset value to make it appear as if trading had been successful.

The complaint can be found here.

Takeaways for Managers

Above all else, keep accurate and honest records. Managers should be sure to follow GAAP when creating financial records for their funds, and never falsify accounting documents. As Orthofix demonstrates, it is also crucially important that managers employ appropriate internal mechanisms to avoid fraudulent or harmful practices from developing. Rule 204-2 under the Advisers Act requires registered advisers to maintain true, complete, and current books and records relating to its investment advisory business. Generally, there are three categories of records to be maintained: (i) business records of the advisor, (ii) records of the adviser that relate to the adviser’s clients and the adviser’s advisory activities, and (iii) records relating to the adviser’s compliance program.


While Gold Mining Corp. and Orthofix involve the relationships between businesses and their subsidiaries, they offer good examples of the need to establish and maintain policies designed to prevent inaccurate recordkeeping. Altamont Global Partners represents a warning for fund managers to avoid falsifying their funds’ financial documents to hide losses or inflate net asset value.


Cole-Frieman & Mallon LLP provides a full suite of legal and compliance services to investment managers. The firm can be reached through our contact page and Bart Mallon can be reached directly at 415-868-5345.

NFA Notice to CPOs with Assets at PFG

Managers Required to Provide Information to NFA Immediately

As has been widely reported, futures FCM PFG has filed for bankruptcy and the CFTC has filed an action against the firm.

Below is a reprinted notice to NFA Members who are commodity pool operators. CPOs must inform the NFA about any accounts held at PFG including information on amount of assets held at PFG and most recent pool NAV. CPOs will need to provide this information to the NFA immediately and there is contact information in the notice below if a CPO has specific questions for the NFA.

If you are a CPO, CTA or IB with assets held at PFG, please contact our firm if you have questions with respect to next steps.


Notice to Members I-12-13

July 10, 2012



On July 9, 2012, National Futures Association (NFA) took an emergency enforcement action against Peregrine Financial Group, Inc. (PFG) and Peregrine Asset Management, Inc. (PAM). NFA deemed this action necessary to protect customers because PFG is unable to demonstrate that it can meet its capital requirements and segregated funds requirements, and because NFA has reason to believe that PFG does not have sufficient assets to meet its obligations to its customers. The CFTC has also filed a complaint in the United States District Court for the Northern District of Illinois against PFG and its owner, Russell R. Wasendorf, Sr. alleging that PFG and Wasendorf committed fraud by misappropriating customer funds, violated customer fund segregation laws, and made false statements in financial statements filed with the Commission.

In light of these events, NFA is requiring all CPO Members with pool accounts held at PFG to provide NFA with a notice of the following information:

The name of each pool account held at PFG and its NFA Pool ID number;

  • The current dollar amount of pool assets held at PFG for each pool account and the corresponding date;
  • The most recent net asset value for each pool with funds at PFG and the date of the valuation;
  • Any withdrawal restrictions that the firm has implemented or plans to implement with respect to each pool.
  • CPO members must provide this information to NFA by sending an email to [email protected] within 48 hours of receiving this notice.

Any questions regarding this request should be directed to:

Tracey Hunt, Senior Manager, at (312) 781-1284 or at [email protected]

Mary McHenry, Senior Manager, at (312) 781-1420 or at [email protected]

You are receiving this message because you are either a Member of National Futures Association (NFA) or you subscribed to the email subscription list on NFA’s Website. To cancel or change your subscription at any time, visit the Email Subscriptions page on our Website at


Bart Mallon is a partner with Cole-Frieman Mallon & Hunt LLP, an investment management law firm with a focus on managed futures law and regulations. Bart can be reached directly at 415-868-5345.

SEC Focusing on Marketing Misrepresentations

SEC v. Kapur Highlights Increased Focused of Examination

On November 10, 2011, the SEC filed in action in the US District Court for the Southern District of New York against Chetan Kapur (“Kapur”) and Lilaboc, LLC (“Lilaboc” or “t

he firm”). The SEC alleged that Kapur and Lilaboc overstated the performance, longevity, and assets of funds they managed as well as Kapur’s credentials as a manager and the due diligence procedures in place to safeguard investments.

The SEC’s complaint claims that Kapur and the firm made numerous misrepresentations in mailings, emails, postings on hedge fund websites, and marketing materials distributed to prospective investors.

The SEC asserted causes of action under Section 17(a) of the Securities Act (prohibiting fraudulent interstate transactions), Section 10(b) of the Exchange Act and related rules (prohibiting the use of manipulative and deceptive devices); Section 206(4) of the Advisers Act (prohibiting acts, practices or courses of business that are fraudulent, deceptive or manipulative), and for equitable relief.

The SEC’s complaint is available here: SEC v. Kapur.

Takeaways for Managers

The alleged misrepresentations included the following:

  • Overstating the performances of funds the firm managed, giving investors the false impression that the funds’ track records were consistently positive and minimally volatile;
  • Statements of the true inception dates of funds, routinely providing information about funds’ performances for years prior to the true creation of said funds;
  • Statements that certain individuals were involved as part of the

    firm’s management team, when in fact they were not affiliated with the firm in any way;

  • Statements that Kapur had an MBA from Wharton and had 15 years of experience in investing. In fact, Kapur only had an undergraduate degree from Wharton, and his claim of 15 years of experience in investing would have meant he began his career when he was 14 years old; and
  • Statements that the firm conducted high levels of due diligence, when in actuality the firm repeatedly failed to conduct due diligence resulting in investments in Ponzi schemes and other fraudulent offerings.

This action highlights several points for managers:

  • The SEC takes a broad approach to enforcing anti-fraud provisions of the securities laws, and managers should pay careful attention to the accuracy of the information provided in their marketing materials;
  • Do not lie in materials provided to prospective investors, including exaggerations about management qualifications, experience and funds’ performances;
  • Be sure to adhere to the procedures and policies you claim to follow; and
  • Maintain files of backup materials to document every factual statement made in your marketing materials.


Though Kapur encompasses a deeply troubling pattern of fraud and misrepresentation, the message from the SEC to managers is clear: managers should take care that the material they provide to prospective clients is accurate and avoid making claims that do not truly reflect the nature of their operations. We recommend that your attorney, in-house counsel or compliance consultant review all marketing materials prior to distributing them, and that you retain these materials and backup information in your files.


Bart Mallon is a partner with Cole-Frieman Mallon & Hunt LLP, an investment management law firm. Bart can be reached directly at 415-868-5345.

Hedge Fund Events July 2012

The following are various hedge fund events happening this month. Please contact us if you would like us to add your event to this list.


July 9
Sponsor: Norton Rose
Event: The Impact of Regulatory Changes in the US
Location: Webinar

July 10
Sponsor: B2B
Event: How Traders Have Been Affected by the Volcker Rule and Other Hindrances
Location: Webinar

July 10
Sponsor: New York Hedge Fund Roundtable
Event: Update on Green Investing
Location: New York, NY

July 11
Sponsor: 100 Women in Hedge Funds
Event: 11th Annual Risk Management Panel
Location: New York, NY

July 12
Sponsor: The Southeastern Hedge Fund Association
Event: The 11th Annual SEHFA Barbeque
Location: Atlanta, GA

July 14
Sponsor: National Association of Investors Corporation
Event: Twin Cities Investor Education Day
Location: Bloomington, MN

July 18
Sponsor: CNBC and Insitutional Investor
Event: Delivering Alpha
Location: New York, NY

July 18
Sponsor: Infovest 21
Event: Morning Liquid Hedge Fund Series: Tax Efficiency, Fees, Structure – What Investors Need To Know About 40 Act Mutual Funds
Location: New York, NY

July 19
Sponsor: Hedge Funds Care
Event: 2nd Annual Midwest Committee of Hope Bags Tournament
Location: Chicago, IL

July 19-20
Sponsor: Financial Rsearch Associates
Event: Private Investment Fund Accounting and Auditing Forum
Location: New York, NY

July 21
Sponsor: Jerry Weintraug and John Botti
Event: 7th Annual West Coast Bike Ride
Location: Sonoma, CA

July 22-25
Sponsor: BZ Events
Event: The SharePoint Technology Conference
Location: Boston, MA

July 23
Sponsor: CFA Institute
Event: Improving the Invesment Decision-making Process
Location: Chicago, IL

July 23-25
Sponsor: Opal Financial Group
Event: Family Office & Private Wealth Management Forum
Location: Newport, RI

July 23-25
Sponsor: Opal Fiancial Group
Event: Public Funds Summit East
Location: Newport, RI

July 25
Sponsor: Hedge Fund Association
Event: HFA Symposium: Evolution of the Hedge Fund Industry in a Newly Regulated World
Location: New York, NY

July 25-27
Sponsor: Infocast
Event: JOBS Act Investment Summit
Location: Santa Clara, CA

July 28
Sponsor: New York Young Professionals Committee
Event: “Behind the Hedges” Cocktail Party
Location: Southhampton, NY

July 30-31
Sponsor: Financial Adviser and Private Wealth
Event: Innovative Alternative Strategies
Location: Denver, CA

July 30-31
Sponsor: Financial Research Associates
Event: Hedge Fund Investment & Operations BOOT CAMP
Location: New York, NY

July 31
Sponsor: Advantage
Event: Are you Investment Worthy?
Location: Jacksonville, FL


Cole-Frieman Mallon & Hunt LLP provides legal services for hedge fund managers and other groups within the investment management industry. Bart Mallon can be reached directly at 415-868-5345.