SEC Brings Action Against Adviser for Causing Hedge Fund to Reimburse It for Fake Expenses

September 9, 2014

The SEC alleged that Steven R. Markusen, the owner of Archer Advisors LLC, an adviser to hedge funds, and Jay C. Cope, an employee of Archer Advisors, implemented a scheme that bilked investors in two hedge funds out of more than $1 million under the guise of research expenses and fees.

The SEC alleges that as the management fees earned by Archer Advisors LLC were shrinking due to the funds' worsening performance, the firm's owner Steven R. Markusen and an employee Jay C. Cope implemented a scheme to enrich themselves at the expense of investors in the funds. Markusen routinely caused the funds to reimburse Archer for fake research expenses, and he eventually routed much of that money to his personal checking account and spent it on country club dues, boarding school tuition, and a Lexus among other luxury items. Furthermore, Markusen devised a way to essentially charge fund investors twice for the same fake research expenses. First, he billed the funds directly by falsely claiming that Archer had paid Cope to conduct "research" for the funds. Second, he and Cope improperly diverted soft dollars from the funds to Cope for the same purported "research" and under the additional pretense that Cope was an independent consultant. Soft dollars were supposed to be used to buy third-party investment research that benefited the funds. Cope conducted no third-party research as an Archer officer whose main duties were placing trades and helping Markusen find new investors.

The SEC also alleged that Markusen and Cope participated in an illicit portfolio pumping scheme.  The SEC stated that Markusen and Cope carried out their portfolio pumping scheme by manipulating the price of the thinly-traded stock of CyberOptics Corp. (CYBE), which comprised over 75 percent of the funds' portfolios and was by far the largest holding. Knowing that Archer's trading as CYBE's largest shareholder could materially impact the market price, Markusen and Cope "marked the close" in CYBE on the last trading day of the month at least 28 times. In doing so, they sought to improperly drive up CYBE's closing price by placing multiple buy orders often seconds before the market closed to artificially pump up the value of the funds' portfolios, which were valued as of the close of trading on the month's last trading day. Those valuations were used to calculate the funds' monthly returns that Archer reported to investors as well as Archer's monthly management fee, which was a fixed percentage of each portfolio's value. The higher CYBE closing price at the end of each month enabled Markusen to inflate the funds' performance and extract more lucrative management fees.

Click here to access the enforcement action.


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