A federal grand jury in New Haven has returned a 19-count indictment charging two Ridgefield executives of New Stream Capital LLC, a Ridgefield-based hedge fund, with conspiracy, securities fraud, and wire fraud offenses.
David Bryson, 44, of Ridgefield, Bart Gutekunst, 61, of Weston, and Richard Pereira, 40, of Ridgefield, surrendered this morning to the FBI in New Haven, said David B. Fein, U.S. attorney for the District of Connecticut, and Kimberly K. Mertz, special agent in charge of the New Haven Division of the FBI.
Mr. Bryson and Mr. Gutekunst were managing partners and principals at New Stream Capital LLC, and Pereira was the chief financial officer.
The defendants appeared before U.S. Magistrate Judge Donna F. Martinez in Hartford and pleaded not guilty to the charges.
Mr. Bryson and Mr. Gutekunst were released on $5 million bonds and Mr. Pereira was released on a $300,000 bond.
Attorney Fein said that, “fearing the loss of their fund’s largest investor, these defendants orchestrated a scheme to deceive investors in order to obtain and maintain investments. The U.S. Attorney’s Office and our many partners on the Connecticut Securities, Commodities and Investor Fraud Task Force are committed to protecting investors and the integrity of American capital markets.”
“It goes without saying that investing carries certain risks,” said FBI Special Agent Mertz. “Those risks, however, should not include any chance that hedge fund managers or other investment professionals are lying to or deceiving their investors about the current state of investments. Investors have a right to full disclosure. Today’s arrests underscore the FBI’s continuing commitment to investigate those who provide material misrepresentations to investors.”
According to the indictment and statements made in court, in November 2007, New Stream launched new feeder funds, one based in the United States (U.S. Fund) and a series of funds based in the Cayman Islands (Cayman Fund).
New Stream also announced that its existing Bermuda Fund would be closing, and all foreign investors would have to move their investments into the Cayman Fund.
Rather than transfer into the new structure, New Stream’s largest investor placed a redemption on its whole investment in the Bermuda Fund in March 2008. At risk of losing their largest investor, the government charges that Mr. Bryson, Mr. Gutekunst, and Mr. Pereira set in motion a scheme to secretly keep the Bermuda Fund open and give priority to Bermuda Fund investors in an effort to reverse the redemption.
As part of the scheme, the government said, the three had New Stream staff secretly reorganize the fund structure so as to effectuate the priority change.
The indictment alleges that New Stream failed to inform investors who had transferred from the Bermuda Fund into the Cayman Fund that the Bermuda Fund was remaining open or that it was being given priority over the Cayman Fund.
Moreover, the government said, New Stream continued to market New Stream to investors by concealing from them the magnitude of the actual pending redemptions and by using deceptive marketing materials that failed to disclose the existence of New Stream’s Bermuda Fund.
Each of the defendants is charged with one count of conspiracy, 10 counts of securities fraud and eight counts of wire fraud.
The conspiracy charge carries a maximum term of imprisonment of five years, and the securities fraud and wire fraud charges carry a maximum term of imprisonment of 20 years on each count.
This case is being investigated by the FBI and the U.S. Department of Labor, Office of Inspector General, with the assistance of the Securities and Exchange Commission, which also issued a lengthy statement Tuesday.
In a parallel action, the Securities and Exchange Commission said Tuesday it had charged both Mr. Bryson and Mr. Gutekunst with lying to investors about their fund’s structure and financial condition before it failed during the financial crisis.
The SEC alleges that the firm’s co-owners secretly revised the fund’s capital structure before it collapsed in order to placate its largest investor, Gottex Fund Management.
Mr. Bryson and Mr. Gutekunst then directed New Stream’s marketing department to continue marketing the hedge fund as though all investors were on the same footing when in fact Gottex had priority over other fund investors in the event of the fund’s liquidation, the SEC said.
The SEC additionally charged Mr. Pereira, New Stream’s former chief financial officer, and Tara Bryson, former head of investor relations, who is David Bryson’s sister. She agreed to settle the SEC’s charges.
New Stream’s Cayman Islands affiliate also was charged in the scheme, which allowed the hedge fund managers to raise nearly $50 million and receive lucrative fees while leaving investors with nearly worthless holdings when the fund went bankrupt.
“Hedge fund managers who put greed ahead of full disclosure to investors violate a fundamental trust,” said George S. Canellos, acting director of the SEC’s Division of Enforcement. “Bryson and Gutekunst told investors they were all investing on equal terms when in fact some were investing in a fund that had been secretly restructured to their detriment.”
According to the SEC’s complaint filed in federal court in Connecticut, New Stream managed a $750 million hedge fund focused on illiquid investments in asset-based lending. In March 2008, Mr. Bryson and Mr. Gutekunst revised the fund’s capital structure after Gottex, a fund manager with nearly $300 million invested in New Stream, had threatened to redeem its investment.
A restructuring of the New Stream hedge fund a few months earlier had created two new feeder funds and eliminated the preferential liquidation rights previously enjoyed by the feeder fund through which Gottex had invested. Mr. Bryson told others at New Stream that if Gottex withdrew, the firm’s hedge fund business would “tank.”
The SEC alleges that revealing to all investors that New Stream restructured to favor Gottex would have made it much harder for the firm to attract and retain investors. Public disclosure also would have jeopardized cash flow from a lucrative fee arrangement that the fund’s managers put in place in late 2007.
Consequently, the SEC said, the fund instead used misleading marketing documents that omitted the change, and Mr. Pereira as CFO falsified the fund’s financial statements to conceal the restructuring.
Investors who asked about redemption levels were not told about the Gottex redemption request and others that followed. For example, the SEC said, Mr. Gutekunst falsely told one investor in June 2008 that there was nothing remarkable about the level of redemptions that New Stream had received and that there were no liquidity concerns.
According to the SEC’s complaint, as the financial crisis worsened in September 2008, New Stream was facing $545 million in redemption requests and was forced to suspend further redemptions and cease raising new funds.
After several failed attempts at restructuring, New Stream and its affiliated entities filed for bankruptcy in March 2011.
The SEC’s complaint charges Mr. Bryson, Mr. Gutekunst, and Mr. Pereira with violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.
The SEC has charged Mr. Bryson and Mr. Gutekunst with violating sections of the Investment Advisers Act of 1940 and Mr. Pereira is charged with aiding and abetting their violations of one section.
The SEC is seeking a variety of sanctions and relief against them including injunctions, disgorgement of ill-gotten gains with prejudgment interest, and penalties.
In the settlement with Ms. Bryson, which is subject to court approval, she agreed to be permanently enjoined from further violations of the provisions of the securities laws at issue in this case. She also agreed to be permanently barred from the securities industry.
The SEC’s investigation is continuing.
The FBI said Tuesday’s announcement is part of efforts underway by President Obama’s Financial Fraud Enforcement Task Force, which was created in November 2009 to wage an “aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes.”
The FBI said that with more than 20 federal agencies, 94 U.S. attorneys’ offices, and state and local partners, “it is the broadest coalition of law enforcement, investigatory, and regulatory agencies ever assembled to combat fraud.
“Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among federal, state, and local authorities; addressing discrimination in the lending and financial markets; and conducting outreach to the public, victims, financial institutions and other organizations.
“Over the past three fiscal years, the Justice Department has filed more than 10,000 financial fraud cases against nearly 15,000 defendants including more than 2,700 mortgage fraud defendants.”
Citizens are encouraged to report any financial fraud schemes by calling, toll-free, 855-236-9740, or by sending an e-mail to [email protected]