SEC Charges Hedge Fund Adviser With $39 Million Fraud

The Securities and Exchange Commission has filed fraud charges against a Detroit-based hedge fund and its owner for allegedly engaging in a multiyear scheme that included misappropriating and misusing investors’ funds for personal use, including for jewelry, credit card payments and his wife’s business.

According to the SEC’s complaint, over the course of nearly five years, Andrew Middlebrooks allegedly deceived investors in his hedge fund, EIA All Weather Alpha Fund I, LP, by making repeated false statements about the fund’s performance and total assets. He allegedly provided falsified investor account statements, lied about the fund having an auditor, and created and disseminated fake audit opinions to investors. The SEC also alleges that Middlebrooks used new investor money to make Ponzi-like payments to earlier investors in the fund in order to trick them into believing that the fund was profitable.

Middlebrooks and his firm, EIA All Weather Alpha Fund I Partners LLC, told investors that the hedge fund had earned cumulative returns of up to 2,500% from its inception through January 2022. However, the SEC alleges that the fund had in fact suffered “catastrophic” trading losses of approximately $27 million.

“As we allege in the complaint, Middlebrooks lured investors by touting extraordinary performance returns and then concealed the truth of his fraud, including by fabricating documents provided to investors,” C. Dabney O’Riordan, co-chief of the SEC’s Asset Management Unit, said in a statement.

The SEC accuses Middlebrooks and his firm of repeatedly lying and engaging in deceptive conduct, including making over $9 million in Ponzi-like payments “to cloak the fund’s abysmal performance.” Middlebrooks also allegedly transferred at least $470,000 to his wife’s business, made more than $750,000 in transfers to his personal bank account, and used $64,000 of investor money to pay for jewelry.

“Middlebrooks’ losing trading strategy coupled with his misappropriation has resulted in a near total loss of investor funds,” the SEC says in its complaint.

The regulator says that to stop the alleged ongoing fraud, it has obtained emergency relief from the U.S. District Court in the Eastern District of Michigan, which includes a temporary restraining order and an asset freeze against EIA and Middlebrooks.

The SEC has charged Middlebrooks and his firm with violating the antifraud provisions of the federal securities laws, and has also charged Middlebrooks with aiding and abetting EIA’s violations of the Investment Advisers Act of 1940. The SEC is seeking injunctions, disgorgement of ill-gotten gains with prejudgment interest and financial penalties against EIA and Middlebrooks.