SEC Sues Florida Hedge Fund and Its Managers Involved in Petters Ponzi Scheme

On October 14, 2010, the Securities and Exchange Commission brought a civil action against two Florida-based hedge fund managers and their funds for defrauding investors out of approximately $1 billion. The SEC charged Palm Beach Capital Management and fund managers Bruce Prevost and David Harrold with committing federal securities fraud by misleading investors about the quality and nature of their investments with Thomas Petters, who was convicted of running a $3.65 billion Ponzi scheme.

The SEC complaint alleges that the fund managers were paid $58 million in fees from 2004 to 2008 when investing with Petters. According to the director of the SEC’s Division of Enforcement, Robert Khuzami, “Prevost and Harrold portrayed themselves as guardians of their hedge fund investors while in fact they facilitated Tom Petters’ fraudulent scheme through lies and deceit.”

The SEC claimed that investors with the Palm Beach fund thought they were funding consumer electronic goods to be sold to big-box retailers and that the retailers, in turn, would pay the funds directly. In reality, the funds were supplied by Petters, which was raised from new investors. “Prevost and Harrold did not disclose this material fact to investors in the funds and instead continued to lie about the operation,” according to the SEC.

The SEC also claimed that by 2008, as the Ponzi scheme was collapsing, Prevost and Harrold started to exchange old loan documents from Petters with new documents to make it appear that the business remained successful, while simultaneously telling investors that the funds were generating “the same steady profits” as before.

The SEC seeks permanent injunctive relief against Prevost and Harrold, disgorgement of illegal profits and an undisclosed financial penalty.