Hong Kong's Securities & Futures Commission (SFC) has been granted an injunction order by the High Court to freeze more than $100 million in assets of Hong Kong-based hedge fund Descartes Athena Fund on suspicion of fraud.
Specifically, the High Court has allowed the SFC to freeze $90.6 million in assets related to individuals and companies connected with Descartes Athena Fund. Another HK$160.89 million ($21 million) that was transferred from company affiliate Descartes Global Asset Management to a third party has also been frozen.
Although nowhere near the estimated losses of $65 billion from Bernie Madoff's Ponzi scheme, this latest case in Asia involving Descartes Athena Fund is exactly the kind of controversy that is adding to some investors' reluctance to trust fund managers with handling their money.
In this case, the SFC acted on concerns that client monies were "at risk of dissipation".
The SFC alleges that the Descartes Athena Fund is a segregated portfolio company incorporated in the Cayman Islands and that Descartes Investment Management was appointed to act as its investment manager. Descartes Investment Management, in turn, delegated all functions and powers to Descartes Global Asset Management, which was the investment adviser of the Descartes Athena Fund, according to the SFC.
At this stage, the SFC suspects the fund raised around $104.9 million from 313 investors in subscriptions. Most of the clients are based in Taiwan.
The SFC says it is concerned because it appears that the operators of the fund purported to liquidate the fund in July 2008 when pressed by clients for redemptions and used what appear to be false documents from a major accounting firm; and false statements of account and subscription contracts purportedly issued by the fund administrators were sent to investors.
The SFC has commenced proceedings against 11 defendants seeking the appointment of administrators and injunction orders over a group of companies and individuals related to Descartes Athena Fund.
The SFC is not naming the individual defendants at this stage because they have not been served with the court orders. The defendants are currently not in Hong Kong.
In the case of one of these defendants, the injunction extends to his assets worldwide. The SFC is not yet in possession of the $90.6 million in assets connected to the Descartes Athena Fund and is conducting further inquiries to identify them. Most of the HK$160.89 million in assets transferred to a third party have been identified and located in Hong Kong and are now held under the terms of the orders obtained by the SFC.
Following an urgent application in the High Court by the SFC on Monday, the court appointed John Robert Lees and Colum Sebastian Joseph Bancroft as joint and several interim administrators of the four companies -- Descartes Investment Management, Descartes Global Asset Management, Descartes Finance, and Descartes Athena Fund.
The interim administrators will take possession of the companies' records and bank accounts, account for and segregate the assets of each of the companies, recover money illegally transferred from the Descartes Athena Fund and report to the court.
The SFC's investigation is continuing. The case will return to court on May 19.
A review of its website shows that Descartes Athena Fund is managed by Descartes Investment Management. Equity derivatives, equity long/short and global macro management are listed as its investment strategies. In a section on risk management, the hedge fund notes that the risk management team has stringent control on cross-border risk, compliance risk, operational risk, liquidity risk, credit risk and market risk. It adds that the hedge fund employs a robust stop loss guideline which requires a full security review once triggered. The hedge fund could not be reached for comment.
In a statement, Bancroft says he, Lees and a team are now investigating the affairs and dealings of the companies involved and will send a circular to all known clients within this week explaining the situation and inviting them to submit their claims.
"We will verify the entitlements of all clients and once these are established, we will apply to the Court for consent to make distributions," Bancroft says. "Any derivative warrants owned by clients will also be dealt with expeditiously."
This would be the second major blow to Taiwanese investors recently. Earlier this week, the US Securities and Exchange Commission implicated California-based Private Equity Management Group (PEM Group) in an alleged fraud involving an estimated $700 million in financial products sold to investors in Taiwan.
In that case, the SEC has frozen the assets of financier Danny Pang. The SEC alleges that Pang and the PEM Group misled investors by falsely claiming that their returns would come from proceeds made on the timeshare or insurance policies investments. The SEC also alleges that Pang and the PEM Group attracted investors by falsely representing Pang as a former senior vice-president and high-tech merger adviser from Morgan Stanley with an MBA from the University of California at Irvine. Pang never worked at Morgan Stanley nor did he attend or obtain any degrees from UC Irvine. Neither Pang nor his entities have ever been registered with the SEC.