SEC revokes advisor’s registration over $60m fraud

The SEC has revoked a New York investment adviser’s registration after accusing the firm of selling $60 million in fake loan assets to hide losses in its “flagship” hedge fund.

The International Investment Group ($373 million in AUM) focuses on trade finance lending – high-risk loans to medium- and small-sized businesses in developing countries.

As losses mounted in its Trade Opportunities Fund, which focused on Latin American lending, IIG overvalued troubled loans, or replaced defaulted loans with fake assets, the Commission alleged in a 14-page complaint filed in federal court in New York on November 21.

Coffee stains

“IIG touted its risk control strategies, which included portfolio concentration limits at the borrower, country, and commodity level,” the complaint states. “It also touted its robust credit review process for borrowers.”

The Trade Opportunities Fund started in 1998 and by 2007 was worth about $300 million. Trouble began when a coffee company defaulted on a $30 million loan, the Commission says.

“Fearing that existing investors would flee the fund and that ongoing fundraising efforts would suffer if the loss were disclosed, IIG’s two co-owners, Executive-1 and Executive-2, decided to conceal the loss and knowingly erroneously valued the loan at par plus accrued interest on the [fund’s] books,” the complaint states.

“When it became untenable to continue to carry the Coffee Loan on TOF’s books,” the Commission adds, “Executive-1 and Executive-2 removed the Coffee Loan from the firm’s books and replaced it with fake loans to different borrowers (each, a ‘Substitute Loan’). The purported borrowers were foreign companies operating in other industries that were controlled by a business associate of IIG. Accordingly, the purported borrowers never received anything of value from TOF, and there was no expectation they ever would make any payments to TOF.”

Something fishy

In 2010, when a seafood company defaulted, again on a $30 million loan, the executives repeated the pattern, the SEC claims.

When IIG needed cash, officials would sell the inflated or phony loans to new investors, including those in IIG’s Global Trade Finance Fund and Structured Trade Finance Fund, the Commission says.

IIG’s web site lists David Hu and Martin Silver as the firm’s cofounders. We’ve reached out to IIG’s Chief Compliance Officer, Thomas LaVecchia, for comment. He hasn’t responded.

On the same day that it lost its license, IIG agreed to a settlement with the SEC where it will come back into compliance with securities laws and suffer a preliminary asset freeze. Its penalties will be determined later.