Washington, D.C., Oct. 14, 2010 — The Securities and Exchange Commission today charged two Florida-based hedge fund managers and their firms with fraudulently funneling more than a billion dollars of investor money into a Ponzi scheme operated by Minnesota businessman Thomas Petters.
The SEC alleges that Bruce F. Prévost of Palm Beach Gardens and David W. Harrold of Del Ray Beach falsely assured their investors and potential investors that the flow of their money would be safeguarded by collateral accounts and described a phony process for protecting their assets. When Petters was unable to make payments on investments held by the funds they managed, Prévost, Harrold, and their firms concealed it from investors by concocting sham note exchange transactions with Petters, who the SEC charged last year along with an Illinois-based hedge fund manager who also facilitated the scheme.
"Prévost and Harrold portrayed themselves as guardians of their hedge fund investors while in fact they facilitated Tom Petters's fraudulent scheme through lies and deceit," said Robert Khuzami, Director of the SEC's Division of Enforcement. "Their betrayal cost investors more than one billion dollars, while they pocketed millions in fees."
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The SEC further alleges that Prévost, Harrold, and their firms devised with Petters a series of bogus note exchange transactions beginning around February 2008. The Palm Beach Funds on multiple occasions exchanged groups of mature notes that were due to be repaid on or about the date of the exchange for newly-issued notes that were not due to be paid for six months and purported to be collateralized by different merchandise associated with different inventory finance transactions. Instead of receiving cash repayments and then reinvesting that cash in new notes as they had done in the past, Prévost and Harrold simply began exchanging old IOUs for new ones, ultimately swapping the vast majority of notes held by the funds. Meanwhile, they continued to falsely report in monthly communications to investors that the funds were generating the same steady profits they had generated since their inceptions. These overstated rates of return resulted in the payment of excessive fees to Prévost, Harrold, and their firms.
Back in 2009, Teri Buhl wrote this at Dealbreaker.com:
Tom Petters was arrested for money laundering by the FBI last October and the SEC said there were $3.5 billion in losses for fund of hedge funds in his Ponzi scheme. For now, court proceedings in the Petters criminal case have been sealed - leaving the victims and the public with few answers about who else conspired in this maze of financial crime and abuse of investor confidence. One such person is a reformed convict turned multimillionaire Frank Vennes, who owns a spreads in Jupiter Island and Minnesota. Sources say Vennes met with Palm Beach's Prevost and Harrold several times in 2001-2002 at his Minnesota lake home to discuss how the managers would raise money solely to invest directly into Petters.
The first PB Finance fund was started in 2003 and grew to $250 million. The second fund began in 2004 with assets at the time of its shut down of $850 million - both were promoted by Jonathan Spring who raised institutional money for other big hedge funds such as Carrington Capital. The fund's operating agreements never discuss investing only with Petters. As late as November 2007, Spring sent a letter soliciting a chance to invest more in what were then closed Palm Beach funds. He wrote, "The risks of this strategy are relatively straight-forward and identifiable....risks I have thought carefully about for the past 4 years."
Vennes, Harrold, and Prevost have yet to be charged criminally for their involvement in Petters fraud. However, the MN US Attorney subpoenaed Vennes' emails when the feds reported that Vennes knew about the Petters Fraud back in 2007.
Listen to this audio selection from the wire of Deanna Coleman. Tom Petters, Bruce Prevost and Frank Vennes Jr. at a meeting 9/9/08.
See also: Petters Receiver Sues Bachmann Pardon Pal Frank Vennes Jr.for $2.3 Billion
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