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Recently, there has been an important decision that affects how pension fraud schemes are handled within the United States by the Securities and Exchange Commission. The recent case was filed against DeVere USA, Inc. DeVere USA Inc. has been registered with the Securities and Exchange Commission since June 5, 2013 and is incorporated in the State of Florida with its principal place of business in New York. DeVere USA, Inc.’s most recent report revealed that it has over $500 million in assets under management for its clients. If you have utilized DeVere’s USA Inc.’s services and have experienced losses, it is highly recommended that you speak with an attorney to see your potential legal rights for recovering your losses. 

Facts of the Case 

A case was filed with the Securities and Exchange Commission due to DeVere USA, Inc.’s failure to make full and fair disclosure to clients and prospective clients about material conflicts of interest regarding external compensation received from third-party product and service providers. DeVere USA Inc. maintains a list of clients from both the U.S. and the U.K. in which it provided investment guidance to its clients about recommended overseas transfers of U.K. pension plans to overseas retirement plans. The way they justified these transfers was that they qualified under the U.K. tax authority’s regulations as a Qualifying Recognised Overseas Pension Scheme (QROPS).

The U.S. Securities and Exchange Commission (“SEC”) has filed a civil lawsuit against a Palm Beach, Florida-based transfer agent and its owner for allegedly defrauding more than 70 investors out of more than $3 million by using “aggressive boiler room tactics” to sell worthless investment securities.

According to the SEC’s lawsuit, which was filed in federal court in New York, International Stock Transfer, Inc. (“IST”) and its sole owner, Cecil Franklin Speight, committed mail fraud and securities fraud by creating and issuing fake securities certificates to both domestic and foreign investors.  While orchestrating a group of “cold callers” who promised investors high returns or discounted prices, Speight and IST actually provided the investors nothing more than counterfeit foreign bond certificates and stock certificates, including some for a publicly-traded microcap company with no connection to IST.  Moreover, to cloak his scheme with an appearance of legitimacy, Speight and IST told investors to send their investment funds to two attorneys who would place the funds in their own bank accounts.  From there, however, the funds did not go to any issuers; instead, the funds went to IST, where Speight used the money to pay personal expenses, including purchases at Mercedes-Benz, Nordstrom, and Groupon.  In the course of this scheme, Speight allegedly stole more than $3.3 million, sporadically paying prior foreign bond fund investors with new investor money in classic Ponzi scheme fashion.

Speight and IST have agreed to settle the SEC’s charges, with Speight agreeing to be barred from serving as an officer or director of a public company, agreeing to be enjoined from participating in any penny stock offerings, and requiring Speight and IST to disgorge all of their ill-gotten gains.  Monetary sanctions will be determined by the Court at a later date, though Speight reportedly faces at least $3.3 million in restitution and a fine equal to double the investors’ losses.  Additionally, Speight has pleaded guilty to a criminal charge in a parallel action brought against him by the U.S. Attorney for the Eastern District of New York.  He faces up to five years in prison.

According to recent SEC filings, the Endowment Master Fund LP, has offered investors an exit strategy from the hedge fund offering a new fund through a Private Placement Memorandum (PPM) which will be used to liquidate the Fund.  The Endowment Master Fund, LP was marketed heavily by Wall Street firms, including Merrill Lynch.  The PPM describes the Offer as a like-kind exchange of investors’ pro-rata interest of the portfolio holdings into a new PMF Fund, LP.   According to the SEC filings, dated February 20, 2014, “the PMF Fund, LP and the Endowment Master Fund, LP will be managed differently, with the PMF Fund, LP managed for purposes of orderly liquidation.”

For investors, the Offer provides little certainty because investors must choose whether to liquidate now without knowing the true value of the Fund which will be determined at a later date.  `The Offer for the like-kind exchange expires March 19, 2014 which requires more than a leap of faith for investors in a hedge fund that has languished far behind the market returns.  Investors must make an investment decision without knowledge of the value exchanged and how much will be realized during the liquidation period.  According to the New York Times article, After Weak Returns, the Endowment Fund Limits Withdrawals, the hedge fund, “began to struggle in 2011, suffering losses of about 4.1 percent, after fees, compared with a gain of 2.5 percent by the S&P 500.”

 On February 24, 2014, a Thomson Reuters article underscores the effects of the substantial hedge fund costs on the Funds dismal performance, “Even for investors who stay with the fund, there will be high costs.  They will not be permitted to ask for any money back this year.  They will also be charged a 1 percent management fee and a 1 percent servicing fee.  On top of that there will be the fund’s underlying managers’ 1.3 percent management fee and a 16 percent of profits as an incentive fee.”  The article points to the hedge fund underperformance in 2013, “with the fund earning only 2.08 percent last year, dramatically trailing the Standard & Poor’s 32 percent gain.”  For Merrill Lynch customer’s, “If investors accessed the Endowment Fund through Merrill Lynch they will have paid as much as a 2.5 percent upfront charge.”

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