The Commission's complaint makes the following allegations. From at least 1998 until January 2002, Strafaci knowingly and recklessly overstated the value of convertible bonds and preferred stock held by the funds, resulting in the dissemination of materially false and misleading fund valuations and performance figures to investors and prospective investors, and the filing of false reports with the Commission.
The hedge funds involved are:
- Lipper Convertibles, L.P., f/k/a Lipco Partners, L.P.;
- Lipper Convertibles Series II, L.P.;
- Lipper Offshore Convertibles, L.P.; and
- Lipper Fixed Income Fund, L.P.
Stephen M. Cutler, Director of the SEC Division of Enforcement, said "The Commission is fully committed to pursuing federal securities law violations wherever they exist, including at hedge funds. And as this case shows, there is also an increasing likelihood that such violations will be criminally prosecuted." The Commission's complaint, filed in the United States District Court for the Southern District of New York, alleges that, contrary to representations in the funds' offering materials, Strafaci valued the convertible bonds and convertible preferred stock in which the funds were invested at prices materially higher than market prices or the fair value of such securities. By way of example, the complaint cites analyses indicating that the value of Convertibles - the largest of the funds - was overstated as follows:
Overstatement of Value of Fund's Convertible Securities | Overstatement of Value of Partners' Capital | |
Dec. 31, '00 | 12-14% | 49% |
June 30, '01 | 13-15% | 44% |
Sept. 30, '01 | 16-19% | 46% |
According to the complaint, the inflated valuations also resulted in inflated performance figures and in some years converted losses to reported profits. The complaint further charges that Strafaci priced the Funds' convertible securities without regard to prices obtained in recent sales, frequently disregarded the views of his traders that his valuations - "marks" - were too high, failed to maintain records supporting his valuations, and refused to explain his marks to Lipper management when questions arose after his departure.
"This case illustrates the potential for mischief in hedge fund portfolio valuations," said Wayne M. Carlin, Director of the Commission's Northeast Regional Office. "Where a fund manager fails to adhere to the fund's representations about pricing, and does not value the fund's securities reasonably and in good faith, he or she has committed fraud."
antifraud provisions of the federal securities laws and with aiding and abetting various books-and-records and reporting provisions applicable to registered investment advisers and broker-dealers. The complaint seeks a permanent injunction, disgorgement, and civil money penalties. The litigation is pending. The Commission's investigation is continuing. The Commission acknowledges the assistance and cooperation of the United States Attorney's Office for the Southern District of New York and the Federal Bureau of Investigation in the investigation of this matter.