Securities Regulation Daily SEC, DOJ charge NY investment manager in multi-million fraud scheme
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Friday, July 17, 2020

SEC, DOJ charge NY investment manager in multi-million fraud scheme

By Lene Powell, J.D.

The managing partner of a New York-based advisory firm specializing in global trade financing is alleged to have directed an intricate scheme that shuffled mismarked and fake loans among multiple funds and Panamanian shell companies.

The SEC and DOJ have brought parallel charges against David Hu, co-founder and chief investment officer of International Investment Group LLC (IIG), in connection with an alleged multi-million dollar fraud scheme that caused losses to investors, including substantial losses to a retail mutual fund. According to the charges, Hu grossly overvalued assets and sold false loans, creating fake entities and paperwork to conceal the fraud (SEC v. Hu, U.S. v. Hu, July 17, 2020).

"As alleged, David Hu directed a multimillion-dollar, years-long scheme to defraud investors. Putting profit ahead of his fiduciary duties, Hu allegedly mismarked millions of dollars of loan assets to cover up millions in losses. Hu also created fake entities and loans, and falsified paperwork to deceive auditors and avoid detection," said Acting Manhattan U.S. Attorney Audrey Strauss. "Now David Hu stands charged with federal crimes and faces time in federal prison."

Massive long-running fraud. Hu and a co-conspirator founded New York-based IIG, an SEC-registered investment adviser, in 1994. Hu acted as managing partner and the chief investment officer for the firm, which specialized in global trade financing and provided investment management and advisory services, including for three private funds it operated.

The SEC filed securities fraud charges against IIG in November 2019, alleging that IIG hid losses in its flagship hedge fund and sold at least $60 million in fake loan assets to clients. Subsequently, the SEC revoked IIG's registration as an investment adviser and obtained a final consent judgment requiring IIG to pay more than $35 million in disgorgement and prejudgment interest.

The SEC alleges that Hu orchestrated the multiple frauds detailed in the action against IIG. Beginning in 2007, IIG hid losses in fund portfolios by overvaluing troubled loans and replacing defaulted loans with fake "performing" loan assets. When IIG needed to create liquidity, including to meet redemption requests, IIG would sell the overvalued and/or fictitious loans to new investors, including, ultimately, to other funds it advised, and use the proceeds to generate the necessary liquidity required to pay off earlier investors.

For example, IIG used money from one institutional fund to cover a default in a loan it recommended to a retail fund it advised. To plug the $6 million hole it had created in the other account, IIG sold the retail fund a new fake $6 million loan, and used those funds to reimburse the account it had raided to make the earlier payment to the retail fund.

In addition to overseeing the scheme of mismarking of distressed and defaulted loans and creating fictitious loans, Hu allegedly directed the creation of a collateralized loan obligation (CLO) trust and Panamanian shell entities to further shuffle funds and create liquidity as needed. Hu also caused the creation of false paperwork to facilitate the scheme.

The DOJ alleges misconduct spanning nearly a decade and fraud amounting to over $100 million. Hu is charged with investment adviser fraud, securities fraud, and wire fraud offenses, carrying a total maximum sentence of 45 years in prison.

The cases are Nos. 1:20-cv-05496 (SEC); 20 Cr. (DOJ).

Attorneys: Philip Andrew Fortino for the SEC.

MainStory: TopStory Enforcement FraudManipulation GCNNews HedgeFundsNews InvestmentAdvisers NewYorkNews

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