San Francisco Hedge Fund Adviser Charged with Fraud

December 21, 2010

The SEC charged two investment adviser firms, American Pegasus LDG, LLC (APLDG) and American Pegasus Investment Management, Inc. (APIM), located in San Francisco and various former officers with defrauding investors in a hedge fund that invested in subprime automobile loans.  The SEC found that Benjamin P. Chui, the firm’s chief executive officer, and Triffany Mok, a portfolio manager and Charles E. Hall, Jr., the firm’s general counsel, engaged in improper self-dealing, misused client assets, and failed to disclose conflicts of interest.

Unbeknownst to investors, the SEC stated that in mid-2007, Chui used more than $18 million in loans and advances from the Auto Loan Fund to buy the fund’s sole supplier of auto loans for himself, Hall, and Mok. According to the SEC, this created a pervasive conflict of interest as Chui, Hall, and Mok had a duty to maximize the fund’s performance while at the same time had an interest in generating profits for the loan supplier they secretly owned.

The SEC also found that Chui used millions in cash borrowed from the Auto Loan Fund to prop up other hedge funds he managed. By late 2008, roughly 40% of the Auto Loan Fund’s assets consisted of “loans” to the fund managers’ related businesses, with fund investors being charged fees based on these undisclosed related-party payments.

The SEC stated that Chui, Hall, and Mok then eliminated much of this debt to the fund off the books by selling assets to the fund at a 300% mark-up. Chui, with help from Hall and Mok, purchased an auto loan portfolio for $12 million in February 2009 — then sold it to the Auto Loan Fund the same day for more than $38 million. The fraudulently inflated sale was used to erase money owed to the fund for the various related-party transactions.

Please click here to access the administrative action.


Categories

Enforcement Actions, Investment Advisers