November 26, 2020

SEC v. New Stream Capital (Cayman), Ltd. et al: Complaint [Hedge Fund accused of $170 Million fraud]

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fbi-sfSpanComplaint in U. S. Securities and Exchange Commission v. New Stream Capital (Cayman), Ltd., New Stream Capital, LLC, David A. Bryson, Bart C. Gutekunst, Richard Pereira, and Tara Bryson at the U. S. District Court for the District of Connecticut.

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Hedge Fund Fraud Took $170 Million, SEC Says

HARTFORD (CN) – New Stream Capital’s hedge fund fraud cost investors $170 million when the fund failed after its directors lied to investors to keep “their management fees flowing,” the SEC claims in court.

According to the SEC’s federal complaint: “This case is about a hedge fund fraud that cost investors millions of dollars when the hedge fund failed in the fall of 2008, after the Defendants perpetrated a scheme to mislead investors about the capital structure of the hedge fund in order to keep the hedge fund afloat and their management fees flowing well into 2008.

“New Stream was an unregistered investment adviser in Ridgefield, Connecticut that at one time managed a $750-plus million hedge fund focused on illiquid investments in asset-based lending. In March 2008, David Bryson and Gutekunst, New Stream’s lead principals and co-owners, set in motion a scheme to secretly revise the hedge fund’s capital structure to placate their largest investor, Gottex Fund Management Ltd. (‘Gottex’), by giving Gottex and certain other preferred offshore investors priority over all the other investors in the event of a liquidation. Gottex had threatened to pull its money out of the New Stream hedge fund because a wholesale restructuring of the fund just a few months earlier had created two new feeder funds and granted equal liquidation rights to all of the investors, thereby eliminating the preferential liquidation rights previously enjoyed by the feeder fund through which Gottex had invested. Gottex’s investment totaled nearly $300 million.

“At the direction of David Bryson and Gutekunst, New Stream’s marketing department, led by Tara Bryson, fraudulently raised nearly $50 million in new investor funds after March 2008 by continuing to use the now obsolete – and thus materially misleading – pre-March 2008 solicitation materials and without disclosing the March 2008 revisions to the capital structure to the new investors whose interests were materially impaired by those changes. In addition, Pereira, New Stream’s CFO, falsified the hedge fund’s operative financial statements to conceal the March 2008 revisions to the capital structure. Not only did the Defendants deceive new investors about the fund’s true capital structure, but they also failed to tell existing investors in the two new feeder funds that, contrary to the representations originally made to them, New Stream had subordinated their positions in the capital structure.

“Disclosure of the March 2008 changes to the capital structure would have made it far more difficult to continue to raise money through the new feeder funds and would have spurred redemptions from existing investors in the new feeder funds. As such, disclosure of the March 2008 changes would have adversely affected the defendants’ own pecuniary interests by, among other things, jeopardizing the increased cash flow from a new, lucrative fee structure that they had implemented in the fall of 2007.

“By the end of September 2008, as the U.S. financial crisis worsened, the New Stream hedge fund was facing $545 million in redemption requests, causing it to suspend further redemptions and cease raising new funds. After several attempts at restructuring failed, New Stream and affiliated funds filed Chapter 11 bankruptcy petitions in March 2011. Based on current estimates, the defrauded investors, whose bankruptcy claims totaled approximately $182 million, are expected to receive approximately five cents on the dollar – substantially less than half the amount that Gottex and other investors in its preferred class are expected to receive.”

The SEC sued New Stream Capital LLC; New Stream Capital (Cayman) Ltd.; David A. Bryson, 44, of Ridgefield; Bart C. Gutekunst, 61, of Weston, Conn.; Richard Pereira, 40, of Ridgefield; and Tara Bryson, 38, of West Suffield, Conn., who is David Bryson’s sister. “She currently works as a goat farmer,” the SEC says.

It seeks restitution, penalties and an injunction telling the defendants not to do such a thing again.

Note: Gottex is not a party to the complaint.

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Ridgefield-based hedge fund executives facing criminal charges of lying

Rob Varnon Financial Mines

David B. Fein, United States Attorney for the District of Connecticut, and Kimberly K. Mertz, Special Agent in Charge of the New Haven Division of the Federal Bureau of Investigation, announced Tuesday a federal grand jury sitting in New Haven returned a 19-count indictment charging three executives of New Stream Capital, LLC, a Ridgefield-based hedge fund, with conspiracy, securities fraud and wire fraud offenses.

The [Securities and Exchange Commission] SEC has also filed a civil complaint against the men.

The feds say that New Stream Cap Managing Partners David Bryson, 44 of Ridgefield and Bart Gutekunst, 61 of Weston, with New Stream CFO Richard Pereira, 40 of Ridgefield, surrendered in the morning to the FBI in New Haven.

The defendants appeared before U.S. Magistrate Judge Donna F. Martinez in Hartford and pleaded not guilty to the charges.

The trio is charged with lying to investors about the status of its offshore funds.

Bryson and Gutekunst were released on $5 million bonds and Pereira on a $300,000 bond.

“As alleged, fearing the loss of their fund’s largest investor, these defendants orchestrated a scheme to deceive investors in order to obtain and maintain investments,” stated U.S. Attorney Fein.  “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,” stated FBI Special Agent in Charge 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 and a series of funds based in the Cayman Islands. 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, it is alleged the three men 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, New Stream staff secretly reorganize the fund structure so as to effectuate the priority change.

The indictment further 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, 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 matter is being investigated by the Federal Bureau of Investigation and the U.S. Department of Labor, Office of Inspector General, with the assistance of the Securities and Exchange Commission.  The case is being prosecuted by Assistant United States Attorneys Liam Brennan and Michael S. McGarry.

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