The complaint was filed in a Manhattan federal court and alleges Beacon Hill “provided false or misleading information to investors” while telling investors its funds were recording solid gains, when in fact they had lost more than half their value.
The SEC’s complaint alleges that Beacon Hill managed three “feeder” hedge funds – Bristol, Safe Harbor, and Milestone – as well as a “master” fund (Beacon Hill Master) through which the feeder funds conducted trading. Those funds principally invested in the mortgage-backed securities markets on a leveraged basis.
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 Sterns & 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 told investors that the funds’ values had dropped 25%. Still, it was not until October 17, 2002 that the company disclosed greater loses than previously stated, reporting a 54% decline. The SEC alleges that at least during July through September 2002, Beacon Hill reported account values and returns to investors that it “knew or should have known were materially overstated.”
The SEC and Beacon Hill have both announced an agreement to establish stricter oversight requirements during the investigation. In a separate statement Beacon Hill said it has agreed “to effect an orderly transition of the funds to a new investment manager, pursuant to an agreement with the SEC.”
In May, the SEC launched an investigation into the hedge fund industry as a whole. One area of interest is how fund managers value holdings, since investors often rely solely on their analysis for fund values.