The complaint is seeking to recover investments worth tens of millions of dollars allegedly lost through fraudulent management practices by the Summit NJ-based hedge fund, according to a news release issued by Brown Rudnick Berlack Israels LLP, the legal firm representing the investors.
The fraud occurred when the hedge fund manager obfuscated from investors the value of its funds and concealed declines in the funds’ values, according to the complaint. Further, the complaint alleges that the fund managers failed to follow the investment strategy represented to investors and created higher levels of risk than investors had bargained for. When this hidden investment strategy failed, Beacon Hill allegedly sent false valuation reports to its investors in the summer of 2002.
“We intend to show that the Beacon defendants, with the help of ATC, the fund administrator and controlling shareholder Asset Alliance, concealed their poor performance and fraudulently misrepresented the value of these funds to the obvious detriment of our fund holders who had aggregate investments in Beacon Hill of $79 million,” said Scott Berman, the attorney who filed the complaint on behalf of the investors.
The hedge fund initially drew the raised eyebrow of the US Securities and Exchange Commission (SEC) after losing more than 50% of its value, roughly $400 million, through losses in mortgage-backed securities, leading to the SEC charging Beacon Hill with civil fraud for allegedly overstating the value of its funds to its investors (See SEC Files Fraud Charges Against Hedge Fund Company ). Following the SEC’s charges, federal prosecutors launched their own criminal investigation of the firm (See Feds Launch Criminal Probe Against Beacon Hill ).
Beacon allegedly told investors the Bristol and Safe Harbor Funds were earning around 9% in the spring and summer of 2002. The company then told its broker, Bear Stearns & Co, that the funds’ total value was $756 million in September. However, Bear Stearns informed Beacon Hill that the funds held only $259.6 million, according to the complaint.
After being told of the actual holdings, Beacon Hill reportedly told investors that the funds’ values had dropped 25%. Still, it was not until October 17, 2002 that the company disclosed greater losses than previously stated, reporting a 54% decline, the Wall Street Journal reported recently. The legal complaint alleges that, in reality, beginning in July 2002, the funds took a large, highly leveraged short position in US Treasury bonds. When interest rates continued to fall, the value of the funds fell, an event that allegedly went unreported to investors.
Charged in the latest complaint were Jack Barry, Thomas Daniels, John Irwin and Mark Miszkiewicz, and New York City-based Asset Alliance Corporation, a 50% owner of Beacon Hill. Also the fund administrator, ATC Trustees Ltd, was charged.