‘Portfolio pumping’ scheme foiled by SEC

San Francisco hedge fund MedCap Management & Research LLC and its principal, Charles Toney, were charged today by the Securities and Exchange Commission with reporting misleading results by “portfolio pumping.”
The fraud allegedly occurred when MedCap Partners LP, a hedge fund run by MedCap Management & Research and Mr. Toney, was suffering from dramatic losses and facing increasing redemptions from fund investors in September 2006.
Over the last four days of that month, the SEC alleges that Mr. Toney placed numerous buy orders for a thinly traded over-the-counter “penny” stock in which MedCap was heavily invested, causing the stock price to more than quadruple to $3.72.
The brief boost in the stock’s price inflated MedCap’s reported value by $29 million, masking what would have otherwise been a 40% quarterly loss, the SEC said.
Mr. Toney did not disclose to investors that the fund’s improved performance was due to his purchasing spree, the SEC said.
MedCap Management & Research also charged fees to the fund based on the inflated quarter-end asset value, the SEC alleges.
“Fund investors relied on [MedCap Management & Research] and Toney to abide by their fiduciary duties and put the fund’s interests ahead of their own,” Marc Fagel, regional director of the SEC’s San Francisco office, said in a release.
“Instead, Toney engaged in trading activity which hid his poor performance.”
MedCap Management & Research and Mr. Toney agreed to cease and desist from violating the antifraud provisions of the Investment Advisers Act without admitting or denying guilt.
MedCap is to pay back more than $70,000 in higher management fees, and Mr. Toney agreed to pay a $100,000 penalty and to be barred from the investment advisory business for a year.
An attorney representing the firm and Mr. Toney did not return a call for comment.

Related Topics: Fines/Censures, Securities and Exchange Commission