By Peter Silvern, JD, Writer/Analyst, Federal Securities Law Reports, Mutual Funds Guide, Investment Adviser Newsletter

SEC Charges Fraud in Hedge Fund Losses

The SEC filed a civil action against adviser David M. Mobley, Sr. and four hedge funds he operated, charging, in part, that he misrepresented losses to clients that may exceed $59 million. Mobley allegedly told potential investors he had more than $450 million in assets under management when he had less than $35 million. According to papers filed by the SEC, 170 clients contributed more than $140 million to Mobley's hedge funds. Much of that money, the complaint alleges, was lost in unprofitable business ventures including a golf and country club development, a research and polling company, a cigar lounge and a plan to build a stadium on a golf course.

Mobley, 43, has provided the SEC with sworn testimony admitting to conceiving and carrying out the fraud described in the SEC's complaint. The hedge funds involved are limited partnerships controlled by Mobley and investors became limited partners as they invested. To hide the losses, Mobley allegedly refused to allow an audit of his hedge funds, claiming it would reveal his secret methods for success.

According to the complaint, Mobley also used fund assets to make sizeable contributions to charities and provide a lavish lifestyle for himself and his family. Among his assets at the time the complaint was filed was a $1.7 million vacation home in Vale, Colorado where he spent an additional $300,000 in furnishings. His home in Napes, Florida, was purchased for more than $800,000 with money allegedly taken from investor funds. Mobley is also said to have paid himself $1million in salary last year and taken a $2 million bonus, all at a time when he was aware of being under investigation by the CFTC.

An independent investigation conducted by a Florida investigation agency revealed that Mobley may have a criminal background from when he lived in Ohio. The agency, who published its report on the Internet days after the SEC took action, indicates that Mobley, through a company he had set up, was refused licensure by the NASD for failure to disclose this background information.

Fraudulent trading was allegedly conducted in the name of Ensign Trading Corp. through Morgan Stanley Dean Witter. To hide the losses he was suffering, the complaint alleges, Mobely created documents reflecting a "fictional, grossly exaggerated return on his funds' investments," and allegedly misrepresented the funds' rates of return.

The complaint charges Mobley with violating 10-b fraud provisions, well as Section 17(a) and Investment Adviser Act provisions and seeks, among other relief, disgorgement of all ill-gotten gains and civil penalties.