The US federal agency, Securities and Exchange Commission (SEC), has charged a Houston-based hedge fund manager and his firm with defrauding investors in two hedge funds and steering bloated fees to a brokerage firm CEO, who has also been charged.

An investigation by the SEC’s enforcement division found that George Jarkesy worked closely with Thomas Belesis to launch two hedge funds that raised US$30 million from investors.

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Jarkesy and his firm John Thomas Capital Management inflated valuations of the funds’ assets, causing the value of investors’ shares to be overstated and his management and incentive fees to be increased. Jarkesy also lied to investors about the identity of the funds’ auditor and prime broker.

According to the SEC’s order instituting administrative proceedings against Jarkesy, Belesis, and their firms, Jarkesy launched the two hedge funds in 2007 and 2009, which were invested in three asset classes: bridge loans to start-up companies, equity investments principally in microcap companies, and life settlement policies.

Jarkesy mispriced certain holdings to increase the net asset values of the funds, which were the basis for calculating the management and incentive fees that Jarkesy deducted from the funds for himself. Jarkesy also falsely claimed that prominent service providers such as KPMG and Deutsche Bank worked with the funds.

SEC said, Jarkesy used fund assets to hire multiple stock promoters in 2010 and 2011 to create an artificial and unsustainable spike in the price of two microcap stocks in which the funds were heavily invested.

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As a result of these efforts, the funds recorded temporary gains in the value of the microcap stocks that Jarkesy used to mask the write-down of other more illiquid holdings of the funds.