U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 23080 / September 9, 2014
Securities and Exchange Commission v. Steven R. Markusen, et al., Civil Action No. 14-cv-3395
SEC Charges Minneapolis-Based Hedge Fund Manager with Bilking Investors and Portfolio Pumping
The Securities and Exchange Commission charged a Minneapolis-based hedge fund manager, his investment advisory firm, and an accomplice with bilking investors in two hedge funds out of more than $1 million under the guise of research expenses and fees.
The SEC alleges that as the management fees earned by Archer Advisors LLC were shrinking due to the funds' worsening performance, the firm's owner Steven R. Markusen and an employee Jay C. Cope implemented a scheme to enrich themselves at the expense of investors in the funds. Markusen routinely caused the funds to reimburse Archer for fake research expenses, and he eventually routed much of that money to his personal checking account and spent it on country club dues, boarding school tuition, and a Lexus among other luxury items. Furthermore, Markusen devised a way to essentially charge fund investors twice for the same fake research expenses. First, he billed the funds directly by falsely claiming that Archer had paid Cope to conduct "research" for the funds. Second, he and Cope improperly diverted soft dollars from the funds to Cope for the same purported "research" and under the additional pretense that Cope was an independent consultant. Soft dollars were supposed to be used to buy third-party investment research that benefited the funds. Cope conducted no third-party research as an Archer officer whose main duties were placing trades and helping Markusen find new investors.
The SEC's complaint filed in federal court in Minneapolis also charges Markusen and Cope with conducting a separate scheme to manipulate the stock price of the funds' largest holding in order to inflate the monthly returns reported to investors and conceal the true extent of the funds' mounting investment losses.
According to the SEC's complaint, the scheme enabled Markusen to secretly pay Cope's salary with fund soft dollars rather than out of Archer's coffers. Markusen and Cope disguised Cope's $10,000 monthly salary payments as research fees because under the governing documents of the hedge funds they managed and SEC rules, Archer employees could not draw a salary from fund assets or receive fund soft dollars for non-research assistance. The SEC alleges that Markusen and Cope traded excessively in the funds' brokerage accounts in order to generate enough soft dollars to pay Cope's monthly salary at Archer. They misrepresented Cope's relationship with Archer to the brokerage firms that administered the funds' soft dollars, and created false and misleading monthly "research" invoices for the amount of Cope's salary. Markusen and Cope sent the invoices each month to the funds' brokerage firms, who in turn paid fund soft dollars directly to Cope for the purported research expenses. Markusen would then receive a $1,000 monthly kickback from Cope.
According to the SEC's complaint, Markusen and Cope carried out their portfolio pumping scheme by manipulating the price of the thinly-traded stock of CyberOptics Corp. (CYBE), which comprised over 75 percent of the funds' portfolios and was by far the largest holding. Knowing that Archer's trading as CYBE's largest shareholder could materially impact the market price, Markusen and Cope "marked the close" in CYBE on the last trading day of the month at least 28 times. In doing so, they sought to improperly drive up CYBE's closing price by placing multiple buy orders often seconds before the market closed to artificially pump up the value of the funds' portfolios, which were valued as of the close of trading on the month's last trading day. Those valuations were used to calculate the funds' monthly returns that Archer reported to investors as well as Archer's monthly management fee, which was a fixed percentage of each portfolio's value. The higher CYBE closing price at the end of each month enabled Markusen to inflate the funds' performance and extract more lucrative management fees.
The SEC's complaint charges Archer, Markusen, and Cope with violating the antifraud provisions of the federal securities laws and certain reporting provisions.
The SEC's investigation was conducted by Nicholas Eichenseer, Luz Aguilar, and Paul Montoya of the Chicago Regional Office, with assistance from Kevin Vincent and Lorraine Ricci of the Office's examination program. The SEC's litigation will be led by John Birkenheier. The SEC appreciates the assistance of the Financial Industry Regulatory Authority.