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Defrauding Investors by Inflating Fund Performance

Meyer Wilson

Broker-dealers who inflate investment fund performance to retain business and gain new clients deny investors the opportunity to make informed investment decisions.

Inflating Fund Performance is Illegal

In May 2018, the Securities and Exchange Commission (SEC) filed charges against Premium Point Investments, a New York investment firm, for inflating fund performance to retain and attract investors. The SEC alleges that the firm engaged in a high-level, six-month investment scam where a firm's adviser exchanged trades with a broker-dealer who inflated valuations on mortgage-backed securities. The firm allegedly inflated fund performance even further by using mid-point valuations. The scam allegedly inflated the value of Premium Point’s securities holdings and grossly exaggerated investment returns to investors.

The recent SEC complaint filed charges against the CEO and chief investment officer of Premium Point Investments, Anilesh Ahuja, as well as a former portfolio manager, Amin Majidi, and a former trader, Jeremy Shor. All three men were charged with fraud and aiding and abetting fraud. The SEC is seeking permanent injunctions against the men, as well as the return of illegally obtained gains including interest and civil penalties.

Hedge funds commonly use pooled funds from large institutional investors and high-net-worth individuals with private investments. When investors invest in hedge funds, cash is distributed into a variety of investments chosen by fund managers who usually receive a percentage of returns. This often creates an opportunity for hedge fund fraud by unethical hedge fund managers. Since hedge funds do not have to register with the SEC, they are not regulated by mandatory reporting rules like other types of investment funds. It's easier for dishonest hedge fund promoters to entice potential investors by promising fast, high returns on their investments.

Most hedge funds do not engage in unethical or illegal behavior. However, large investments and intense competition can lead to investment fraud. Although hedge funds are not subject to mandated reporting rules, mandated fiduciary duties may still apply. Hedge fund managers and promoters must comply with the same duties as other securities brokers. If they don't, they can be charged with investment fraud.

Investors rely on their brokers to accurately value their investments so they can make informed investment decisions. When the true performance or value of an investment is masked and an investor loses money, he or she can file a lawsuit or arbitration case to hold the broker liable for damages. Investors who lose money may be able to recover the purchase price of the securities, the gains he or she reasonably should have expected to make had the funds been invested appropriately, arbitration costs, and reasonable attorney fees. In some situations, when egregious misconduct is involved, the investor may be entitled to punitive damages.

Dishonest brokers often defraud investors by inflating hedge fund performance to show profits that do not exist. If you have been a victim of securities fraud and need legal assistance with loss recovery, contact the attorneys at Meyer Wilson at 888-390-6491 for a free consultation today.

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