In New SEC Fraud Case, Wall Street Seems Lined With Potemkin Villages

March 22, 2012

Seal of the U.S. Securities and Exchange Commi...

On March 15, 2012, the Securities and Exchange Commission ("SEC") filed a Complaint in federal District Court for the Northern District of California charging investment adviser James Michael Murray with defrauding investors of Market Neutral Trading, LLC ("MNT"), an investment fund he controlled.  The Complaintalleges that Murray provided the investors with a phony audit report, which materially misstated the financial condition and performance of MNT.  Moreover, the audit report was allegedly issued by a fictitious audit firm. The SEC seeks an order enjoining Murray from future violations of the securities laws and requiring him to pay a civil monetary penalty. SEC v. James Michael Murray (CV12-1288, NDCA, March 15, 2012).

  • Murray, age 42, Larkspur, CA, has served as MNT's sole member and investment adviser since 2006.  Previously, he worked at three large brokerage firms and has held the Series 7, 63, and 65 securities licenses.
  • MNT, a Delaware limited liability company with its principal place of business in San Francisco, CA, has operated since August 2008 as a fund purportedly investing in securities.  Murray allegedly has ultimate control over all MNT trading decisions.
  • Jones, Moore & Associates, Ltd. ("JMA") is a Delaware corporation with a purported principal place of business is in Wilmington, DE, and holds itself out as providing audit and accounting services.

The SEC alleges that Murray raised over $4.5 million from investors in his various funds including MNT, a purported hedge fund that claimed to invest primarily in domestic equities.  In furtherance of what the SEC depicts as a scheme, Murray began raising funding in 2008 and in 2009 allegedly provided MNT investors with an audit report prepared by JMA, a purportedly prepared by independent auditor.

Phony Baloney

The SEC characterizes the audit report as "phony."  In support of such a characterization, theComplaint alleges that the audit report misstated the financial condition and performance of MNT through understated costs of MNT's investments.  As a result of such a diminution in the valuation of the true costs, MNT's investment gains allegedly were overstated by about 90%.  Additionally, the SEC alleges that the audit report overstated MNT's

  • income by approximately 35 percent,
  • its member capital by approximately 18 percent, and
  • its total assets by approximately 10 percent.

Compounding the purportedly false audit representations, the Complaintasserts that JMA is not a legitimate accounting firm but rather a shell company that Murray secretly created and controlled.  The SEC alleges that JMA is not registered or licensed as an accounting firm, and that its websitewas paid for by a Murray-controlled entity.  Of twelve MNT professionals with specific degrees and licenses who are listed on the firm's website, the SEC claims that at least five of these professionals do not exist, including the two named principals of the firm: "Richard Jones" and "Joseph Moore."  Finally, the Complaint alleges that Murray attempted to open brokerage accounts in the name of JMA, identified himself as JMA's chief financial officer, and called brokerage firms falsely claiming to be the principal identified on most JMA documents.

The U.S. Attorney's Office for the Northern District of California also has filed criminal charges against Murray in a Complaint unsealed March 20, 2012.

NOTE: The charges in the civil and criminal complaints are merely allegations and the defendants are presumed innocent unless and until found guilty in a court of law.

Bill Singer's Comment

In recent years we've read about the Madoff and Stanford frauds.  Similarly, we've read about major financial services firms - Citigroup, JP Morgan, Morgan Stanley, UBS, Bank of America - having their own run ins with regulators and/or prosecutors.  If there's a common denominator among many of these cases, it's that investors think that they were sold one thing or told one thing and, shockingly, what they bought and what they heard didn't always match up with what they were promised.

In SEC v. Murray it all gets worse, much worse - if the SEC's allegations are to be believed (and ultimately proven).  Investors who thought that they had invested well had their opinions confirmed by a seemingly real audit report prepared by a seemingly real auditor.  But for the fact that the auditor now appears to be bogus and the report "phony."

Alas, has Wall Street become lined with Potemkin villages?