Washington, D.C., March 15, 2011 – The Securities and Exchange Commission today charged a hedge fund investment advisory firm and its two founders with orchestrating a multi-faceted scheme to defraud clients and failing to comply with fiduciary obligations.
The SEC alleges that Eugenio Verzili and Arturo Rodriguez through their firm Juno Mother Earth Asset Management LLC misappropriated client assets, inflated assets under management, and filed false information with the SEC. Juno, Verzili and Rodriguez looted approximately $1.8 million of assets from a hedge fund they manage, misusing it to pay Juno’s operating costs related to payroll, rent, travel, meals, and entertainment. They issued promissory notes to conceal a substantial portion of their misappropriation. Juno, Verzili and Rodriguez also misrepresented the amount of capital that some Juno partners had invested in one of its funds, claiming they had invested millions of dollars when they actually had invested nothing in the funds.
“Verzili, Rodriguez and their firm violated the most fundamental duties of an investment adviser by lying to their clients and misappropriating the money entrusted to their care,” said George S. Canellos, Director of the SEC’s New York Regional Office. “They compounded their wrongdoing by providing false information in filings with the SEC that are designed to ensure that registered investment advisers make full disclosure to investors.”
Bruce Karpati, Co-Chief of the Asset Management Unit in the SEC’s Division of Enforcement, said, “Hedge fund investors derive comfort from knowing the fund’s adviser has so-called ‘skin in the game’ by investing its own money side-by-side with investors and sharing the same risks and rewards. These managers deliberately distorted their skin in the game.”
According to the SEC’s complaint filed in the U.S. District Court for the Southern District of New York, Juno sold securities in client brokerage and commodity accounts and directed 41 separate transfers of cash to Juno’s bank account, claiming falsely that the transfers were reimbursements for expenses Juno had incurred on behalf of the client fund. Verzili and Rodriguez later fabricated and issued nine promissory notes to make it appear that the client fund had invested the money in Juno. But they concealed the so-called investment from the independent directors of the client fund.
The SEC’s complaint further alleges that Juno, Verzili and Rodriguez marketed investments in the Juno-advised fund and failed to disclose Juno’s precarious financial condition to investors. They also failed to disclose that Juno owed a client fund a minimum of $1.2 million, which represented the proceeds of the promissory notes. While offering and selling securities in the client fund, Juno repeatedly inflated and misrepresented the amount of assets that Juno managed and claimed at one point that Juno had as much as $200 million under management. Verzili also represented falsely to investors that Juno’s partners had up to $3 million of their own capital invested in a client fund. Juno’s partners had never actually invested any of their own money.
The SEC alleges that Juno filed false Forms ADV with the SEC in order to avoid deregistration with the Commission, claiming in those filings that Juno managed $40 million more than it actually did. Verzili and Rodriguez also caused Juno to provide a number of false filings to the SEC that failed to disclose that Juno had engaged in principal transactions with its client and had custody of client assets.
The SEC’s complaint charges Juno, Verzili and Rodriguez with violations of the antifraud provisions of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940, as well as additional regulatory-based violations of the Advisers Act. The SEC seeks permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest, and monetary penalties.
The SEC’s case was investigated by New York Regional Office staff including Ken C. Joseph and Mark D. Salzberg of the Asset Management Unit and Elzbieta Wraga, with assistance from examiners Eugenio Cantiello, Majid Mahmood, Raymond Slezak and Joseph DiMaria. Jack Kaufman will lead the SEC’s litigation.
The SEC acknowledges the assistance of the Cayman Islands Monetary Authority and the Financial Market Authority Liechtenstein.