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News May 9, 2005 Issue

Red Flag #47: Thank You Very, Very Much for Investing In Us! (How Can We Help?)

If your firm invests in companies that provide benefits to your firm or any firm employees, you very well may have a conflict of interest situation that needs to be halted or disclosed.

In a case brought last week against a Manhattan-based hedge fund, the SEC alleged that the hedge fund adviser’s president, Vincent Montagna, personally benefited from payments from some of the companies in which his hedge funds invested.

The SEC alleged that one of the portfolio companies paid some of Montagna’s personal expenses. The company, said the SEC, "made payments totaling at least $12,000 on Montagna’s behalf to Mercedes-Benz, American Express, State Farm, and in one case, to his wife." The SEC also claimed that the company made a $7,000 payment to one of Montagna’s personal creditors. Other companies also paid some of Montagna’s expenses. One wired $50,000 to Montagna personally, rather than to the hedge fund, the SEC claimed.

The SEC also alleged that Montagna "knew or recklessly disregarded" that two of the hedge fund’s significant holdings were worthless, while the fund continued to send out "extremely positive" performance figures. "The performance figures Montagna provided [to the firm’s chief operating officer] to disseminate to investors were false and substantially overstated, in that they lacked a factual basis and were not calculated in a manner consistent with representations to investors regarding valuation of illiquid assets or in good faith," alleged the SEC.

The SEC charged Montagna with several counts of securities fraud, including fraud under the Advisers Act.