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Compliance

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SEC Fines Hedge Fund for Self-Dealing

The fund has been ordered to pay $1.2 million for car-loan investments.

The US Securities and Exchange Commission ordered a San Francisco hedge fund and three former employees to pay $1.2 million to resolve claims they misused client assets while investing in subprime car loans, reports Bloomberg.

According to the charges, Benjamin Chui, Triffany Mok and Charles E. Hall Jr. engaged in improper self-dealing and failed to disclose conflicts of interest to clients of their $100 million fund, American Pegasus. The firm - Chui, Hall and Mok - resolved the claims without admitting or denying wrongdoing.

Chui, who was the firm's CEO, used more than $18 million of client money in 2007 to buy the fund's sole supplier of auto loans for himself, Mok and Hall. The acquisition, which wasn't disclosed to clients, created a "pervasive conflict" between their interest in generating profits for the loan supplier and their duty to maximize the fund's performance, the SEC said.

"Fund advisers have a duty to disclose conflicts of interest and act in the best interests of clients," says Marc Fagel, director of the SEC's San Francisco office. The employees "created a tangled financial web, using investor funds for their personal benefit and then attempting to paper over the misconduct by inflating the value of fund assets."

Chui borrowed millions of dollars from the fund to prop up other hedge funds he managed. By late 2008, about 40 percent of the fund's assets consisted of loans to his related businesses. The three employees then sold much of that debt to American Pegasus clients at a 300 percent mark-up to erase money owed to the fund for various transactions, the SEC said.

As part of the ruling, Chui agreed to be barred from associating with an investment adviser for five years, while Hall and Mok face three-year and one-year bans, respectively.

American Pegasus fully cooperated with the SEC during the investigation and the three individuals "voluntarily resigned their positions earlier this year," Patrick DiChiro, the company's attorney. "American Pegasus has implemented new compliance measures designed to improve communications with investors and protect against conflicts of interest."

Phil Albinus is the former editor-in-chief of Advanced Trading. He has nearly two decades of journalism experience and has been covering financial technology and regulation for nine years. Before joining Advanced Trading, he served as editor of Waters, a monthly trade journal ... View Full Bio

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