SEC Stops Allegedly Fraudulent Hedge Fund Offering that Raised $39 Million

The SEC has charged Florida-based investment adviser Kinetic Investment Group, and its manager Michael Scott Williams, in connection with an allegedly fraudulent unregistered securities offering that raised approximately $39 million from at least 30 investors to invest in a purported hedge fund. The regulator also obtained an asset freeze and other emergency relief against the company and Williams.

According to the SEC’s complaint, since at least 2013, Williams and Kinetic fraudulently raised the $39 million by making material misrepresentations to investors whom they solicited to invest in a purported hedge fund called Kinetic Funds I LLC. The SEC said Williams allegedly told investors Kinetic Funds’ largest sub-fund, Kinetic Funds Yield, invested solely in US-listed financial products, and that at least 90% of its portfolio was hedged using listed options. KFYield was also touted as a liquid investment.

However, according to the SEC’s allegations, Williams diverted a big chunk of KFYield investor capital to KCL Services LLC, which conducted business under the name Lendacy, which was a private startup company owned by Williams. Lendacy was neither listed on a US exchange nor capable of being hedged with listed options. Williams then directed Lendacy to make loans using KFYield assets to himself, entities controlled by him, and others. All told, Williams allegedly misappropriated at least $6.3 million through undisclosed loans to himself and his startups.

“Kinetic Group’s and Williams’ misrepresentations gave false comfort to investors that their investments would be secure and liquid,” Eric Bustillo, director of the SEC’s Miami Regional Office, said in a statement. “As alleged, however, Kinetic Group and Williams diverted a substantial portion of investor capital to Williams’ various business ventures and personal expenses.”

Williams allegedly used more than $1.5 million to buy three luxury apartments and two parking spaces for himself in San Juan, Puerto Rico. He also allegedly used at least $2.7 million to purchase a historic bank building in Old San Juan, and other funds to pay off the mortgage on a house belonging to a relative.

When certain employees raised concerns to Williams about his use of KFYield funds to pay for the San Juan properties, Williams allegedly responded by saying he was expecting a future payout from the sale of an unrelated company and that he would pay the fund back at that time.

The order also said Williams expanded the company’s marketing materials in order to attract more investors. He arranged to have a description of KFYield and its performance information, assets under management (AUM), and holdings available on Bloomberg’s computer system, which allows viewers to access real-time financial data on companies.

The SEC said Williams allegedly took this step in order to make KFYield appear transparent and to give it a measure of credibility. He provided potential investors with Bloomberg reports about the KFYield strategy, although it was Williams who was responsible for the content and accuracy of the information provided to Bloomberg, not Bloomberg.

The US District Court for the Middle District of Florida also granted the SEC’s request to appoint Mark Kornfeld as receiver over Kinetic Group and the relief defendants.

The charges against Williams include violating the antifraud provisions of the federal securities laws and aiding and abetting Kinetic Group’s violations of the federal securities laws. The SEC is seeking injunctions, disgorgement of allegedly ill-gotten gains with pre-judgment interest, and financial penalties against Williams.