The Securities and Exchange Commission today charged a New York-based investment adviser, Hyaline Capital Management, LLC, and one of its founders, Justin D. Meadlin, with disseminating false information to prospective investors and clients in order to induce them to invest money with them.
The case arose from the SEC's Aberrational Performance Inquiry, an initiative led by the Enforcement Division's Asset Management Unit that uses proprietary risk analytics to identify hedge funds with suspicious returns.
The SEC's complaint, filed in federal court in New York, alleges that beginning in September 2012 and continuing through April 2013, Meadlin disseminated dozens of emails to prospective investors and clients in which he inflated Hyaline's assets under management (AUM), claiming that Hyaline managed between $17 million and $25 million when it managed no more than $5.5 million during that time. The complaint also alleges that beginning in January 2013 and continuing to at least June 2014, Meadlin began touting a purported "quantitative" trading strategy and a fictitious Hyaline Capital Quantitative Fund (HCQF) in email solicitations to more than two dozen prospective investors and in subscription hedge fund databases. Meadlin allegedly claimed that HCQF had as much as $25 million in assets, and claimed historical performance returns dating back to 2009 that were purportedly from a proprietary algorithm, when, in fact, HCQF never existed; neither Meadlin nor Hyaline had acquired a proprietary algorithm; and the stated performance returns were based almost entirely on paper trades without real capital and exaggerated by approximately 20%. The complaint also alleges that before July 2013, Meadlin and Hyaline managed no assets in any quantitative strategy at all, and even after July 2013, they never managed more than $3.3 million in AUM in the strategy. The SEC's complaint further alleges that Meadlin and Hyaline fraudulently induced investments from at least two clients using the false performance and AUM data.
The SEC's complaint charges Meadlin and Hyaline with violations of the anti-fraud provisions of the securities laws and seeks injunctive relief, disgorgement and penalties against Meadlin and Hyaline.
The SEC's investigation was conducted by Stephen B. Holden and Dan Pines and supervised by Panayiota K. Bougiamas of the Asset Management Unit. Richard Primoff and Mr. Holden will lead the SEC's litigation.