Partner in defunct fund faces US court

Date: Tuesday, April 7, 2009
Author: Jim Loney, Reuters

A partner in KL Group, a now-defunct Florida hedge fund company that defrauded investors of nearly $200 million (134 million pounds), appeared in a U.S. court on Friday following his capture in South Korea after years on the run.

Won Sok Lee was indicted in 2006 on nearly three dozen charges including conspiracy, wire fraud, mail fraud and money laundering. The criminal indictment followed a civil securities fraud case filed by the U.S. Securities and Exchange Commission, which moved to shut down his company in 2005.

Lee was captured in Seoul in February trying to board a flight to Argentina, prosecutors told U.S. Magistrate Ann Vitunac in West Palm Beach during his initial court appearance. They opposed his release, arguing he could flee again, and a bail hearing was scheduled for next Friday.

Prosecutors alleged Lee and two other men, brothers Jung Bae Kim and Yung Bae Kim, ran a number of hedge funds in Florida and Nevada under variations on the name KL Group.

The men claimed Jung Bae Kim had invented a proprietary day trading system and told investors their flagship KL Group Fund earned in excess of 100 percent per year.

"In truth, almost from its inception, the main fund suffered losses in each and every quarter of its existence," prosecutors said in the indictment, alleging Lee and the others siphoned off money for personal expenses while using the funds to pay "false profits" to original investors.

The funds raised over $194 million between 2000 and 2005, prosecutors said.

The U.S. Securities and Exchange Commission moved against KL in 2005, getting a court to put the company into receivership and freeze its assets.

The KL case bears a strong resemblance to some of the more famous ones that came later, including the fraud perpetrated by New York asset manager Bernard Madoff and the alleged Ponzi scheme of Sarasota, Florida, money manager Arthur Nadel.

"It sort of provided a template for a lot of other cases that came before and after. Scam artists brought in a huge amount of money, often from relatively sophisticated investors," said Scott Masel, a senior trial counsel for the SEC who was involved in filing the KL case four years ago.

"People invested because other people they knew were investing and said they were doing well," he said. "There was a strong social component to this."

The KL Group receiver recovered about $6.6 million, of which $2.8 million was returned to investors and other claimants, according to court documents.

Jung Bae Kim was sentenced to 18 years in prison and Yung Bae Kim to six years, the documents said.