Securities and Exchange Commission Announces Charges against Houston-based Hedge Fund Manager

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The Securities and Exchange Commission (“SEC”) has announced civil charges against a hedge fund manager and his firm, and accused them of defrauding investors out of approximately $30 million and steering bloated fees to a brokerage firm CEO who the SEC also is charged in the case.  See SEC Order attached.

The SEC’s Enforcement Division alleges that George R. Jarkesy Jr. and Thomas Belesis launched two hedge funds and raised millions of dollars from investors. Mr. Jarkesy and his firm John Thomas Capital Management allegedly overstated the funds’ assets, resulting in the value of investors’ shares to be overstated, while his management and incentive fees increased.  Mr. Jarkesy is a media commentator and radio talk show host.  The SEC accuses him of lying to investors about the funds’ auditor’s and prime broker’s identity. For example, the SEC claims that, despite the fact that they shared the same brand name, Mr. Jarkesy’s firm and Mr. Belesis’ firm John Thomas Financial were allegedly held out to be wholly independent. Mr. Jarkesy allegedly led investors to believe that as manager of the funds, he was solely responsible for all investment decisions. But Mr. Belesis allegedly occasionally acted as the decision maker and directed some investments from the hedge funds into a company in which his firm was heavily invested.  The SEC also claims that Mr. Belesis bullied Mr. Jarkesy into showering excessive fees on John Thomas Financial even in instances where the firm had done virtually nothing to earn them.

According to the SEC’s order instituting administrative proceedings against Mr. Jarkesy, Mr. Belesis, and their firms, Mr. Jarkesy launched the two hedge funds in 2007 and 2009, and they were called John Thomas Bridge and Opportunity Fund LP I and John Thomas Bridge and Opportunity Fund LP II. They invested in three asset classes: bridge loans to start-up companies, equity investments principally in microcap companies, and life settlement policies. Mr. Jarkesy allegedly mispriced certain holdings to increase the net asset values of the funds, which were the basis for calculating the management and incentive fees that Mr. Jarkesy deducted from the funds for himself. Mr. Jarkesy is also alleged to have falsely claimed that prominent service providers such as KPMG and Deutsche Bank worked with the funds.

According to the SEC, Mr. Jarkesy used fund assets to hire multiple stock promoters in 2010 and 2011 to create an artificial and unsustainable spike in the price of two microcap stocks in which the funds were heavily invested. As a result of these efforts, the SEC claims that the funds recorded temporary gains in the value of the microcap stocks that Mr. Jarkesy used to hide the write-down of other more illiquid holdings of the funds.  The SEC claims that Mr. Jarkesy violated his fiduciary duties to the funds in multiple instances by providing excessive compensation to Mr. Belesis and John Thomas Financial.

The SEC’s order claims that Mr. Jarkesy and John Thomas Capital Management violated and aided and abetted violations of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5, and violated Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act and Rule 206(4)-8. The SEC’s order further charges that Mr. Belesis and John Thomas Financial aided and abetted and caused Mr. Jarkesy’s and John Thomas Capital Management’s violations of Sections 206(1), 206(2) and 206(4) of the Advisers Act and Rule 206(4)-8.