The SEC has barred a Connecticut-based hedge fund manager after it discovered he lost $1.8 million in client assets from allegedly engaging in risky investment practices.
According to a cease-and-desist order from the SEC, Matthew Rossi and Fairfield, Conn.-based SJL Capital allegedly defrauded clients by misleading them about the nature and performance of their investment strategy, and by concealing trading losses. Rossi was the founder, managing partner, and 80% majority owner of SJL.
The order said that Rossi told investors that SJL’s MarketDNA Hedge Fund would invest in a diversified portfolio consisting primarily of publicly traded equities. Rossi said the fund would use what he claimed was a highly successful proprietary algorithm that he developed called MarketDNA. He told investors the algorithm had been refined over 20 years and included stop losses to limit downside risk.
However, the SEC said Rossi and SJL “engaged in risky, unhedged options trading, which did not comport with the purported MarketDNA strategy and did not include any safety valves or stop loss limits.”
What had started out to be very promising for investors turned sour quickly. In June 2016, Rossi allegedly used the hedge fund’s assets to make a series of unhedged trades in put options and put trades, but managed to end the month with a whopping 101% return. The fund had additional gains of 15% from unhedged options trading in July, and reached its peak valuation of more than $1.3 million at the end of that month.
However, the fund’s success proved to be short lived as it lost approximately 88% of its value in August 2016 due to unhedged options trading. The largest losses came on Aug. 19 when Rossi sold short-dated Amazon call options at a loss of over $600,000. Minutes after closing that position, he purchased more Amazon call options as well as Priceline call options, and lost over $68,000 when he sold the Amazon options on Aug. 22. The fund was completely wiped out by November 2016.
Rossi allegedly hid the extent of the losses from investors by creating and distributing fake account statements and tax documents that falsely described the fund’s assets, as well as the supposed returns generated by the MarketDNA strategy.
According to the order, clients invested nearly $1.8 million with Rossi and SJL, and when they found out about the losses, Rossi allegedly fabricated a story that the losses were caused by a rogue trader who had been making trades for Rossi while he was undergoing knee surgery and couldn’t work.
The SEC has barred Rossi from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization. He is also prohibited from serving or acting as an employee, officer, director, member of an advisory board, or investment adviser.