Highview Point Partners and Michael Kenwood Capital Management Ponzi Scheme: The Fund Paid for Someone Else’s Shares

The Securities and Exchange Commission’s Ponzi scheme case against Highview Point Partners and Michael Kenwood Capital Management included allegations that at least $53 million in investor money bought private-company shares for entities controlled by the manager. The commission also alleged that money from one fund paid another fund’s investors. If you worked with the fund accounts, the question would be immediate: why did your fund pay for shares registered to someone else?

This case follows the fund transfers, the ownership of those shares and the false verification offered when the Securities and Exchange Commission asked where the assets were. Our broader account of investment adviser and fund Ponzi schemes compares the payment pattern across different businesses.

What Did the Hedge Funds Promise Investors?

According to the Securities and Exchange Commission’s original complaint, the Short Term Liquidity Fund offered a strategy built principally around short-term investments in fixed-income securities and derivatives referencing them. Its offering memorandum generally allowed investors to redeem on 30 days’ notice. That promise matters when the money buys shares in a development-stage business whose product cannot yet be sold.

The original complaint described Michael Kenwood Capital Management as an unregistered investment adviser based in Stamford, Connecticut. It advised the Short Term Liquidity Fund and the MK Venezuela Fund, whose investors included offshore individuals and entities. The original complaint said a foreign corporate pension fund supplied approximately 90% of the money invested in those funds.

The commission’s announcement about Highview Point Partners identified it as another Stamford investment adviser controlled by the same manager. It managed Highview Point Master Fund, Highview Point Offshore and Highview Point LP, which the commission alleged held money tainted by the Ponzi scheme. The announcement reported that $230 million held offshore had been returned to the United States under a court order and remained frozen.

The Securities and Exchange Commission alleged that the investments made with the Michael Kenwood funds’ money contradicted what investors had been told. The offering memorandum did not provide for undisclosed loans to the adviser or companies under its control. The amended complaint also said it did not disclose using one fund’s money to redeem investors in other funds.

How Did the Funds Pay Earlier Investors?

The Securities and Exchange Commission’s amended complaint alleged that money from the Short Term Liquidity Fund helped redeem investors in the MK Venezuela Fund. It alleged that management was trying to wind up the latter fund while concealing missing assets and investment losses. In that account, investors left one fund by putting the burden on another.

The amended complaint alleged that a bond exchange through the foreign pension fund helped conceal those payments. The pension fund transferred longer-dated bonds expecting shorter-dated bonds in return. Instead, the manager sent the bonds to the MK Venezuela Fund, which sold them and used proceeds to redeem its investors and transfer money to the Short Term Liquidity Fund.

According to the complaint, the Short Term Liquidity Fund then used its own investors’ money to buy replacement bonds for the pension fund and transferred them without receiving payment. The SEC said the result was at least $57 million from the Short Term Liquidity Fund used to help fund the other fund’s redemptions. For an employee handling the transfers, the bond purchase and the investor withdrawal were parts of the same transaction, even though they appeared in different accounts.

The manager put the Short Term Liquidity Fund’s value at $540 million at the end of 2010, according to the amended complaint. The SEC alleged that its actual assets were worth substantially less, partly because money had gone to the other fund’s investors. It also alleged that Michael Kenwood Capital Management and the manager took fees based on assets and performance figures they had manufactured. The inflated numbers did another job: they paid management.

Where Did the Private-Company Shares Go?

The Securities and Exchange Commission’s original complaint alleged that companies controlled by the manager became the registered shareholders in private businesses bought with fund money. The ownership records put the investments in different hands from the accounts that paid for them.

The largest alleged private-equity investment sent almost $23 million to a West Coast nuclear-energy company. Money from the MK Venezuela Fund and the Short Term Liquidity Fund passed through Michael Kenwood Asset Management, which became the registered owner of the shares. The commission said the company was still developing its product and did not expect approval to sell it until at least 2014. The fund promised liquidity. The product was still waiting for permission.

The steel investment followed the same ownership pattern. The Securities and Exchange Commission alleged that approximately $6.7 million in investor money went to a Spanish rolled-steel company, with shares registered to MK Energy and Infrastructure. The transfers included money sent through a Highview Point Offshore account that the SEC believed held MK Venezuela Fund money, as well as transfers from the Short Term Liquidity Fund. We see who came out ahead in the commission’s allegation: the funds paid, while the manager’s companies got the shares.

According to the original complaint, when the Securities and Exchange Commission investigated, the manager characterized the private-equity transfers as loans to his companies. The complaint alleged that investors had not been told about such loans, that they were unsecured and that all but one lacked loan documents. The pension fund executive interviewed by SEC staff knew about private-equity investments but said he did not know pension money had been used to make loans.

A Verification Letter for Assets That Did Not Exist

The Securities and Exchange Commission alleged that an accountant’s letter purported to verify at least $275 million in loans owed to the Short Term Liquidity Fund by entities in Venezuela. Management supplied the letter during the SEC investigation and claimed the supposed assets formed part of what the MK Venezuela Fund had transferred to the Short Term Liquidity Fund. The amended complaint’s conclusion about those assets was blunt:

The Justice Department’s account of court documents and statements in the criminal case said the manager paid a Venezuelan accountant and a purported Florida businessman $1.25 million to help create the fictitious verification letter. It said he used the letter to mislead the SEC about whether the fund had sufficient capital and credit to protect investors. The Justice Department’s account says he pleaded guilty to fraud and obstruction-related charges.

For someone who worked on confirmations or reconciliations, the underlying loan records would matter more than the appearance of the letter. The alleged verification supplied a balance precisely where the SEC was asking for evidence that the assets existed.

The commission later reported that the court approved an initial distribution of $264,580,160 from assets recovered by the court-appointed receiver. A later update reported completed distributions to harmed parties and plans for further payments as additional funds became available.

What Records Show Where the Highview and Michael Kenwood Funds’ Money Went?

In this case, the useful comparisons connect the offering, the bank transfers and the registered ownership of the investments. An offering memorandum describes what investors were buying, while subscription records identify which fund received their money. Transfer instructions, fund ledgers and bank records then show where that money went. The private-company share records answer who received ownership in exchange.

Those are different jobs inside a fund business. The adviser makes investment and allocation decisions, while custody and transfer records show assets held or moved under instructions. Our securities fraud evidence discussion follows these comparisons across the records. Here, an employee who knew why a transfer was authorized, when a loan document appeared or how a fee was calculated could connect the investor-facing account to the transaction underneath it.

The verification letter adds another comparison: what the accountant actually checked against what management submitted to the SEC. Loan agreements, confirmations, underlying balances and communications about the letter would let us test that representation. This is where we work with your knowledge of the business, including the meaning of entries that an outsider might read without understanding why they were made.

A 2018 study in the Journal of Forensic & Investigative Accounting, The Significance of Whistleblowing as an Anti-Fraud Measure, examined 4,943 occupational fraud cases with complete data. It found that whistleblowers detected 35.9% of those cases, compared with 21.4% detected through internal controls. The study also found that fraud involving more participants was more likely to be detected by a whistleblower. An insider may see one transfer or one verification request yet be able to explain what the completed statement leaves out.

SEC whistleblowers can receive 10% to 30% of sanctions collected in an action with monetary sanctions exceeding $1 million. For a separate case involving fraud against government money, a whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

You Know What the Fund Actually Bought

If you handled fund transfers, private-company share records or the work behind an asset-verification letter, talk with our whistleblower experts about what you saw. We build the case around your knowledge and bring in securities fraud whistleblower lawyers who understand pooled investments, false valuations and concealed transfers. We stay beside you as that inside account becomes a case the authorities can test.