Morgan Hedge | Hedge Fund Database

SEC levies $100m fine on Lewis Chester

Date: WED, APR 04 2012
Topic: Funds & Investment

A US court set the penalty, the highest imposed by US regulators on a foreign citizen, last week on Lewis Chester and his firm Pentagon Capital Management for defrauding US mutual funds of tens of millions of dollars between 1999 and 2003.

Mr Chester and PCM??s fine exceeds the $92.8m civil penalty awarded against Raj Rajaratnam in November last year.

An interim opinion issued by the New York Southern District court in mid-February had previously fined Mr Chester and PCM $76.8m ?? a sum that was increased by the same court last week by nearly $22m to $98.6m.

Mr Chester told investors he believed the actions of the Securities and Exchange Commission, which brought the case, to be ??unjust?. An earlier investigation into the firm by the UK??s Financial Services Authority was dropped.

At its peak Pentagon had more than $2bn assets under management.

Mr Chester liquidated funds run by Pentagon in late March 2008 after being notified by the SEC of its intention to bring a case against him.

PCM routinely sought to persuade brokers to buy, redeem or exchange shares in mutual funds after funds?? daily 4pm dealing deadline in the US, according to the SEC??s case.

The London-based fund manager was able to profit on behalf of its clients from market-moving events that occurred after 4pm by buying or redeeming mutual fund shares based on the daily net asset value that had already been fixed at that time, said the SEC.

According to judge Robert Sweet, who presided over the case brought by the SEC, Mr Chester and PCM ??intentionally, and egregiously? violated antifraud provisions of US securities laws.

??Defendants understood that late trading was illegal and acted with marked scienter, going to great lengths to seek out, structure, and maintain the ability to deceive the funds into accepting their late trades and attempting to cover up their late trading after the fact,? said Judge Sweet.





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