The U.S. Securities & Exchange Commission last month filed a lawsuit against London - based hedge fund Headstart Advisers for alleged fraudulent trading in mutual funds. In its claim, filed in the U.S District Court in the Southern District of New York, the SEC claims Headstart benefited from “illicit profits” worth approximately $198 million. The lawsuit also named Najy N. Nasser, Headstart’s chief investment adviser and sole director, as a defendant.
The alleged fraud took place between 1998 and 2003 when, according to the SEC, Headstart traded U.S. mutual funds through accounts and numerous brokers and “routinely engaged” in late trading. Trading in mutual funds after market close enables traders to profit and gain an advantage by trading mutual fund shares at prices set before market-moving information is released.
The regulator also alleges that Headstart participated in market timing - buying or selling mutual fund shares to exploit inefficiencies in market fund pricing. For example, it says, Headstart used deceptive techniques such as opening numerous accounts to keep the size of its trades below certain thresholds to conceal the extent of its trading.
In order to open multiple accounts, the SEC claims Headstart set up numerous subsidiaries and when naming new accounts issued instructions to employees to name accounts after “Shakespeare, TV shows or comics.” It was also suggested that names of accounts should include the designation “401” in order to make mutual funds think Headstart accounts were associated with U.S. pension 401(k) plans, which would be entitled to unlimited trades. Among the accounts opened by Headstart were “Helios 401,” “Prometheus 401” and, in a reference to the Harry Potter character, one named (but misspelled) “Voldermort.”
Headstart, which is based in Chelsea, has issued a robust response. In a statement it said it would “vigorously” defend the action and that the SEC complaint was “utterly misguided.” It also stressed that the U.K.’s Financial Services Authority had already reviewed its trading activity during this time and found nothing “improper or irregular.”
Headstart has also stated that the SEC claim refers to an obsolete fund and that none its current funds are subject to the lawsuit.
To read the full SEC complaint, click here: SEC v. Headstart Advisers Limited.