Fraud, $57 Million in Losses in 2 Weeks and Not Yet 30 Years Old

  • Canarsie Capital founder apologized to his 41 investors
  • Li faces 20-year maximum prison term on most serious charge

Canarsie Capital founder Owen Li managed to lose $57 million in two weeks, leaving his investors with only $200,000 and a letter of apology.

Now, he can add a felony conviction to that record after admitting he lied to investors and regulators about his hedge fund’s performance. All before his 30th birthday.

Li, 29, surrendered to U.S. authorities Wednesday and pleaded guilty to a single count of securities fraud and making a false statement, Manhattan U.S. Attorney Preet Bharara said in a statement. He faces as long as 20 years in prison when he’s sentenced.

Li’s fund collapsed in January after the firm lost $57 million, or almost all the money held by its 41 investors, from Dec. 31 to Jan. 16.

Prosecutors said Li lost about $18 million at the start of January 2015 when he began selling off long equity positions in the fund and eliminated all of its short positions. The resulting unhedged, long portfolio lost almost all its value about two weeks later when index options prices moved against Canarsie’s positions, according to the government.

Li was barred Wednesday from the securities industry in a settlement of claims against him by the U.S. Securities and Exchange Commission, the agency said in a statement.

According to the SEC, Li, after graduating from college in 2008, worked as a trading assistant for Galleon Management LP, an arm of the hedge fund company run by Raj Rajaratnam, who was convicted of insider trading and sentenced to 11 years in prison.

Galleon Probe

The Galleon probe marked the beginning of a crackdown on insider trading that led to charges against scores of people. Li wasn’t accused of wrongdoing related to Galleon.

Li started Canarsie in 2012 following a stint as a trader for an investment adviser founded by a former Galleon colleague.

Starting at the end of December, he sold off the fund’s long positions and invested the proceeds in market index call options with a Jan. 17 expiration date. 

Li lost about $39 million on Jan. 16 when his long bet on the movement of market indexes failed, according to the SEC. 

‘Extreme Sorrow’

In a Jan. 20 letter to the fund’s investors, Li expressed his “extreme sorrow” for losing all but $200,000 of the fund’s capital.

“In an attempt to recover losses that the fund suffered in December, I engaged in a series of aggressive transactions over the last three weeks that -- generally speaking -- involved options with strike prices pegged to the broader market increasing in value,” Li said in the letter.

“Unfortunately, these positions rapidly declined in value over the past two weeks as the market struggled—and I was unable to mitigate the fund’s losses.”

The case is U.S. v. Li, U.S. District Court, Southern District of New York (Manhattan).

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