The SEC has revoked the registration of New York-based investment adviser International Investment Group LLC (IIG), which the regulator charged with securities fraud for hiding losses in its flagship hedge fund and selling at least $60 million in fake loan assets to clients.
According to the SEC’s complaint, IIG allegedly overvalued defaulted loans in the fund’s portfolio to conceal losses in its flagship hedge fund. The SEC also alleged that the firm altered its records to show that the defaulted loans had been repaid and that the proceeds had been used to make new loans. There had been no repayment, however, and the purported new loans were fake, the regulator said.
IIG specializes in trade finance lending to small-and medium-sized companies in emerging markets. It is the investment adviser to private investment funds the Trade Opportunities Fund (TOF), the Global Trade Finance Fund (GTFF), and the Structured Trade Finance Fund (STFF).
Beginning around 2007, IIG allegedly engaged in a practice of hiding losses in the TOF portfolio by overvaluing troubled loans and replacing defaulted loans with fake performing loan assets. When it was necessary to create liquidity, including meeting redemption requests, IIG would sell the overvalued and/or fictitious loans to new investors, including to GTFF and STFF. It would use the proceeds to generate the necessary liquidity required to pay off earlier investors.
The SEC also alleges that IIG raised money to meet investor redemption requests and other liabilities by selling at least $60 million in fake trade finance loans to other clients. To trick clients into purchasing these loans, an IIG employee allegedly had fake documentation created to substantiate the non-existent loans, including fake promissory notes and a forged credit agreement.
“This case shows that even sophisticated professional investors can fall victim to Ponzi schemes,” Daniel Michael, chief of the SEC’s Complex Financial Instruments Unit, said in a statement. “The revocation of IIG’s registration is necessary to protect the public in light of IIG’s egregious breaches of its fiduciary duty as an investment adviser.”
IIG also advised an open-end mutual fund marketed to retail investors and to selected trade finance loans for the fund’s portfolio. Around March 2017, one of the loans IIG had recommended had defaulted on a $6 million payment. Worried that the default would cause the fund to end the advisory relationship with IIG, the firm used funds from an account under its control to make the defaulted payment.
This gave the appearance that the borrower was creditworthy and current in its payments. To fill the $6 million hole it had created in the other account, IIG sold the retail fund a new fake $6 million loan and used those funds to reimburse the account it had raided to make the earlier payment to the retail fund.
IIG consented to a bifurcated settlement under which it is enjoined from future violations of the antifraud provisions of the federal securities laws. The judgment also imposes a preliminary asset freeze, but reserves the issue of any monetary relief, including disgorgement, prejudgment interest, and civil penalties, for further determination by the court.
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