In the first criminal case against a hedge fund for market timing, Beacon Rock Capital LLC and a former broker were charged with defrauding mutual funds of $2.4 million.
In the first criminal case against a hedge fund for market timing, Beacon Rock Capital LLC and a former broker were charged with defrauding mutual funds of $2.4 million.
The U.S. Attorney in the Eastern District of Pennsylvania charged Beacon Rock and Thomas Gerbasio, a New York- and Philadelphia-based broker, with fraudulently engaging in market-timing activities, U.S. Attorney Pat Meehan said in a statement.
According to the charges, the Portland, Ore.-based hedge fund and Mr. Gerbasio received and were aware of several warnings from mutual fund companies that such market timing was "unwanted" and "potentially harmful" to shareholders.
Some of the practices included creating and using multiple account numbers and other identifiers, structuring mutual fund purchases to remain under certain perceived thresholds, and misrepresenting the hedge fund's trading strategy when directly confronted by the mutual funds, the statement said.
"These defendants would not have been able to make the money that they did on the trades had they not represented themselves to the mutual funds," said Mr. Meehan, in the statement.
The statement said Beacon Rock made more than 26,000 market-timing trades, while Mr. Gerbasio, earned about $215,000 from them, it added.
If convicted, Beacon Rock faces a maximum $25 million fine and Mr. Gerbasio a maximum of 20 years in jail, a $5 million fine.
"The company has been cooperating with the U.S. Attorney's office and all government agencies," said Scott A. Resnik, partner at Katten Muchin Rosenman LLP in New York, the firm representing Beacon Rock.
"It is important to recognize that no Beacon Rock employees are accused of any criminal wrongdoing or behaviors."
He added that Beacon Rock ceased any market timing activities in 2003.
