Sec. & Exch. Comm'n v. Pentagon Capital Mgmt. PLC
| Citation | 844 F.Supp.2d 377 |
| Decision Date | 14 February 2012 |
| Docket Number | No. 08 Civ. 3324.,08 Civ. 3324. |
| Parties | SECURITIES and EXCHANGE COMMISSION, Plaintiff, v. PENTAGON CAPITAL MANAGEMENT PLC and Lewis Chester, Defendants, and PENTAGON SPECIAL PURPOSE FUND, LTD., Relief Defendant. |
| Court | U.S. District Court — Southern District of New York |
OPINION TEXT STARTS HERE
Securities and Exchange Commission, New York Regional Office, by: Paul G. Gizzi, Esq., Christopher J. Dunnigan, Esq., John C. Lehmann Jr., Esq., New York, NY, for Plaintiff.
Pepper Hamilton LLP, Hamilton Square by: Frank C. Razzano, Esq., Ivan B. Knauer, Esq., Matthew D. Foster, Esq., Washington, DC, for Defendants.
On April 3, 2008, the Securities and Exchange Commission (“Plaintiff” or “SEC”) commenced the instant enforcement action against defendants Pentagon Capital Management PLC (“PCM” or “Pentagon”), Lewis Chester (“Chester”) and relief defendant Pentagon Special PurposeFund, Ltd. (“PSPF”) (collectively, the “Defendants”), alleging that PCM and Chester had orchestrated a scheme to defraud mutual funds in the United States through late trading and deceptive market timing in violation of Section 17(a) of the Securities Act of 1933 (“Securities Act”), 15 U.S.C. § 77q(a), Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78j(b), and Rule 10b–5, 17 C.F.R. § 240.10b–5, thereunder. In the alternative, the SEC asserted a claim of aiding and abetting violations of Section 10(b) and Rule 10b–5. The following findings of fact and conclusions of law result from the evidence presented at the bench trial and all the prior proceedings. Based on the findings and conclusions, the Court grants in part and denies in part the relief sought by the SEC and will enter judgment providing injunctive relief, disgorgement of $38,416,500 and civil penalties of $38,416,500.
PCM, a British hedge fund, traded the shares of mutual funds from 1999 through September 2003 on the New York Stock Exchange. This trading included two practices challenged by the SEC in this action as securities violations, namely, market timing and late trading. The issues surrounding these practices are complicated and controversial as evidenced by the eighteen witnesses and the many hundreds of exhibits presented by the able and skilled counsel. The entire record establishes that the Defendants did not violate the securities law by pursuing a strategy of market timing, but did violate the securities laws by engaging in late trading, thereby entitling the SEC to judgment.
I. PRIOR PROCEEDINGS
This case was initiated by the SEC on April 3, 2008. (Dkt. No. 1.) On August 1, 2008, Defendants filed a motion to dismiss. (Dkt. No. 11.) On September 9, 2008, the SEC filed an amended complaint (Dkt. No. 15), and on October 8, 2008, Defendants again moved to dismiss (Dkt. No. 23). That motion was heard on December 3, 2008, and by an opinion of February 9, 2009 it was denied. SEC v. Pentagon Capital Management PLC, 612 F.Supp.2d 241 (S.D.N.Y.2009).
On March 16, 2011, the SEC moved for partial summary judgment, (Dkt. No. 92.) That motion was heard on April 5, 2011 and denied in open court and then by memo endorsement on April 22, 2011 (Dkt. No. 141).
Beginning on April 12, 2011, the bench trial was conducted over seventeen days, ending May 4, 2011. The eighteen witnesses included: Professor Lawrence Harris, Samuel Engelson, Scott Christian, Lewis Chester, Carl Heppenstall, Seth Gersch, Thomas Feretic, Philip Hetzel, Said Haidar, Matthew Perrone, Justin Ficken, Dino Coppola, Gregory Trautman, Professor Jonathan Macey, Dr. Anthony Profit, Edward Stern, Conrad Ciccotello, and Jafar Omid.
Final argument was heard on September 27, 2011.
II. FINDINGS OF FACTA. The Parties
The SEC is the federal agency, established following the stock market crash of 1929, that is charged with enforcing federal securities laws and regulating the national securities markets.
In the 1980's Jafar Omid (“Omid”) and David Chester, defendant Chester's father (“Chester, Sr.”), were partners in an accounting firm in the United Kingdom and formed a wealth management advisory firm, Booth Anderson Investment Services,which traded European mutual funds using a dynamic asset allocation strategy. The term “dynamic asset allocation” is a British or European term for what Americans called “market timing.”
The strategy sought to generate profits based on buying and selling mutual funds as markets moved up or down, Chester, Sr. believed that as markets were moving up, investors should be invested in equity mutual funds, and when markets were moving down, they should be invested in cash. To assist in this determination, Chester, Sr. developed a basic statistical analysis.
In 1998, Chester joined the firm and Chester, Sr. retired for health reasons. Until 2003, Chester served as PCM's Chief Executive Officer. Chester is a graduate of the University of Oxford in England, the College of Law in London, and the Harvard Business School. He is also qualified as a solicitor in England and Wales and, prior to joining PCM, Chester summered at the law firm White & Case in the United States and worked for three years as an international corporate attorney at the London law firm Linklaters & Paines.
Following Chester Sr.'s...
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