Pentagon Capital Management Plc, a closed U.K. hedge fund, was ordered to pay $76.8 million in a lawsuit filed in 2008 by the U.S. Securities and Exchange Commission over allegedly abusive mutual fund trading.
U.S. District Judge Robert Sweet in Manhattan ruled today that the SEC proved its claim in a 17-day trial last year that the hedge fund and its chief executive officer, Lewis Chester, engaged in a fraudulent scheme by making mutual fund trades after the 4 p.m. close of markets in New York.
“The defendants intentionally, and egregiously, violated the federal securities laws through a scheme of late trading,” Sweet wrote in today’s decision. “This scheme was broad-ranging over the course of several years and in no sense isolated.”
Sweet ruled that Pentagon Capital and Chester must disgorge $38.4 million in improper profits on the trades. He imposed the same amount as an additional civil penalty.
“We are extremely disappointed by the judgment and intend to appeal,” Frank Razzano, a lawyer for the defendants, said in a telephone interview.
Sweet ruled against the SEC’s claim that Pentagon Capital committed fraud by making deceptive, rapid-fire transactions known as market-timed trades.
Pentagon Capital said in 2008 that it was closing and returning investors’ money because of the SEC investigation and civil suit.
The case is Securities and Exchange Commission v. Pentagon Capital Management PLC, 08-cv-3324, U.S. District Court, Southern District of New York (Manhattan).
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