Lake Shore Asset Management Accounts Frozen by U.S. (Update4)

Date: Friday, June 29, 2007
Author: Matthew Leising, Bloomberg

June 28 (Bloomberg) -- Lake Shore Asset Management Ltd., a hedge fund firm run by a former chairman of the Chicago Mercantile Exchange, had its assets frozen by a federal court after regulators said it overstated its holdings.

Chicago-based Lake Shore purported to manage $1 billion for investors and traded in U.S. commodities futures contracts, according to the Commodity Futures Trading Commission. A review later showed the fund had about $466 million. Lake Shore barred regulators from inspecting its accounts on June 14, a violation of the Commodity Exchange Act, according to the CFTC's complaint.

``The message here is we're not going to sit by and wait to connect all the dots before we go in and freeze'' accounts, said Geoffrey Aronow, the former head of enforcement at the CFTC and now a partner at Heller Ehrman LLP in Washington. ``Whether it's conscious or not, everyone is more attuned to concerns to what's going on with hedge funds.''

Hedge funds Amaranth Advisors LLC and MotherRock LP, as well as the Bank of Montreal, have faced significant losses in commodities markets within the past year. Amaranth lost $6.6 billion in the largest-ever hedge fund collapse after some natural-gas trades turned against it.

Laurence Rosenberg is listed as Lake Shore's director, according to records from the National Futures Association, a self-regulating group for the U.S. futures industry. He is a previous chairman of the Chicago Mercantile Exchange, the largest U.S. futures exchange. Lake Shore had been profitable 13 years in a row, the CFTC said.

The CFTC froze $228 million in investor money at Lake Shore, according to agency spokeswoman Ianthe Zabel.

Critical Tool

``The commission's ability to inspect books and records is a critical regulatory tool that allows us access to a registrant's daily operations,'' Gregory Mocek, the CFTC's head of enforcement, said in a statement.

Lake Shore is a so-called commodity pool operator, a type of investment group which seeks to aggregate money to trade futures and options on commodities and other financial instruments. There were 1,898 CPOs in 2004 that held $594 billion in net assets, according to the CFTC.

Inconsistent Statements

The CFTC complaint alleges that Rosenberg and others at the fund gave inconsistent statements to regulators regarding the fund's activity and that it has refused to make documents available to the agency.

On June 14, the National Futures Association was allowed by Rosenberg to review Lake Shore's protected Web site, where it discovered the fund had $466 million in managed accounts, ``dramatically less than Rosenberg's estimate that LAM had approximately $1 billion under management,'' the CFTC said, referring to the fund by its initials.

A hearing on the matter is scheduled for July 11, the CFTC said.

Rosenberg did not return a call for comment. Drew Mauck, a spokesman for the company, declined to comment.

Rosenberg served as a Chicago Mercantile Exchange director from 1970 to 1993 and held chairman or vice chairman positions there between 1974 and 1988, according to filings with the U.S. Securities and Exchange Commission. He also was a legislative liaison for the Chicago exchange in 1989 and 1990 and a senior policy adviser in 1991.

Lake Shore's parent company, the Lake Shore Group of Companies, has clients in more than 40 countries and offices in Chicago, Bermuda, Hong Kong and London, according to press releases issued by the company this year.

`Particularly Aggressive'

Aronow said it was routine for the National Futures Association to conduct financial and general reviews of its members. The move by the CFTC to freeze Lake Shore's accounts was a serious remedy when there were no allegations of wrongdoing by the fund in the CFTC's complaint, said Aronow, who had read the CFTC complaint.

``What's particularly aggressive about this is getting an asset freeze right away because things aren't adding up,'' he said. ``They don't appear to have any direct evidence of anything improper. They just weren't getting answers.''

Judge Blanche Manning of the U.S. District Court for the Northern District of Illinois granted the CFTC's request to freeze Lake Shore's assets and to prevent it from destroying documents related to the inquiry, according to a court filing dated yesterday.

Violations

Manning ruled that Lake Shore ``has engaged, is engaging in, and is about to engage in violations'' of the Commodities Exchange Act and granted the restraining order on the fund ``to preserve the status quo and to protect public customers from loss and damage.''

Some of Lake Shore's funds have trading accounts with the London offices of Man Financial Inc., Lehman Brothers Holdings Inc. and Fimat, a unit of Societe Generale SA, according to the complaint.

Lake Shore started a new Web site this month to ``provide high quality, transparent client communications,'' according to a June 12 press release. That's one day after the National Futures Association started its review of the firm's Web site, according to today's complaint.

To contact the reporter on this story: Matthew Leising in New York at mleising@bloomberg.net